1. According to Atkinson and Hackler, what do neoclassical economists view as the most effective policy in addressing the challenges of climate change?

First of all, they believe that economic growth is achieved by maximizing allocative efficiency, One is that the economy is built upon the interaction of firms and consumers in markets determined by price signals. Indeed, allocative efficiency revolves around the responsiveness of economic agents to price signals. Consequently, neoclassical economists emphasize “price mechanisms” like interest rates, currency values, inflation, and other monetary factors that determine the value of capital and labor more. Also, they point out that supply normally meets demand is another neoclassical principle. In this paradigm, the economy is simply a large market of goods and services that is generally in equilibrium and usually best left to itself. Their final relevant principle of neoclassical economics is that individuals act in response to incentives to rationally maximize their own self-interest, and that the collective pursuit of individual self-interest will also maximize public interest.

5. The authors discuss their theory of “Innovation Economics.” What reasons do authors cite as to why Innovation Economics offers a more effective framework for addressing the economic realities of the 21^st century.

The author cites three factors to prove that innovation economics offers a more effective framework for addressing the economic realities of the 21^st century. He point out that, First, each doctrine focuses in an almost Newtonian way on adjusting the demand or supply of capital and labor to keep the economy in equilibrium and to secure economic growth, which undervalues the importance of innovation. Second, each concentrates on macroeconomic factors, particularly prices, rather than on the institutional- and technological-change factors that drive growth, albeit in different ways in different countries and times.4 Finally he said that, none of the prevailing doctrines’ principles focus on the complex process of technological innovation and the messy and complicated world of firms, industries, and national innovation systems as these institutions relate to economic growth.

Rovendra Permaul

Econ 2505

Assignment 1

1. According to Atkinson and Hackler, what do neoclassical economists view as the most effective policy in addressing the challenges of climate change?

The Neoclassical economists believe that setting a price on carbon via carbon tax or cap-and-trade, in addition to using allocative efficiency is the best way in addressing the challenges of climate change. Allocative efficiency by definition is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.

6. Describe the policy advocated by the IETA and why they believe this policy to be effective.

The International Emissions Trading Association (IETA) advocates a cap and trade system to reduce global emissions. This Cap-and-Trade system sets limits on emissions, allows private companies room to reduce emissions while still being economically feasible.

There are many reasons why the IETA believes this policy is effective. Cap-and-Trade emissions trading is set to produce an environmental outcome, where the cap has to be met. The carbon tax produces revenue, but doesn’t ensure a specific level of emissions. Cap-and-Trade provides a measurable amount of emission reduction on the environment. Secondly, The IETA believes Cap-and-Trade provides the most economical delivery of emissions by combining trading with a price for producing CO2. The market-based approach self stabilizes the price for emissions as well. The price of emissions will decline as an economic downturn takes effect. In addition, The Cap-and-Trade system can provide an international limit setting platform since it is the results of emissions are measurable. Lastly, The IETA believes this is a proven and tested trading system with established reductions in carbon emissions upon the environment.

Reading assignment for Tuesday Feb. 16

Read the following articles, 1. Economic Doctrines and Approaches to Climate Change Policy by Atkinson and Hackler, (pgs. 1 – 9; 15 – 16; 22 – 23 and 33 – 36) and 2. Why Emissions Trading is More Effective than an Carbon Tax by the International Emissions Trading Association and comment/answer any two of the following questions by 12 noon Feb. 7.

Atkinson-etal-2010-econ-climate-change_theories

Why Emissions Trading is More Effective Than a Carbon Tax_session1

In pages 1 – 9, the authors discuss their views of how Neoclassical, Neo-Keynesian and Innovation Economics would design economic policies to address the issue of climate change. Discuss your answers to any two of the following questions:

1. According to Atkinson and Hackler, what do neoclassical economists view as the most effective policy in addressing the challenges of climate change?

2. What assumptions does neoclassical economics make about human behavior? Are these assumptions realistic? Explain

3.  According to Atkinson and Hackler, what are two or three arguments made by neo-Keynesian economics?  What policy does neo-Keynesian economics see as most effective in addressing the challenges of climate change? Describe

4. What are the principal problems the authors have with both neoclassical and neo-Keynesian economic proposals for resolving climate change? Clearly explain.

5. The authors discuss their theory of “Innovation Economics.” What reasons do authors cite as to why Innovation Economics offers a more effective framework for addressing the economic realities of the 21^st century.

6. Describe the policy advocated by the IETA and why they believe this policy to be effective.