The economics of climate change policy 

Global warning is a serious problem that has the potential to damage our planet in the foreseeable future. There is a consensus within the scientific community that it is increasing and needs to be addressed immediately. Viable solutions have been put forth such as a carbon tax, emissions trading scheme and others. So what is the issue? Scientists are giving grave warnings, and the government has solutions to reduce emissions. Easy? What is the problem? One of the most basic economic concepts learned in all first year microeconomic courses around the world can explain this seemingly bizarre behavior. Game theory - more specifically, Prisoner’s Dilemma.

If Australia implements a carbon tax and other countries do not, it will put it at a competitive disadvantage because the cost of manufacturing, exports and living will go up as a carbon tax will increase the price of some inputs and overhead costs. This will put other countries at a relative competitive advantage. This will decrease the NX component of the GDP equation as Australia’s exports become more expensive and imports become relatively cheaper. On the other hand, if all other countries implemented a carbon tax and Australia did not, Australia would become relatively more competitive.

The Prisoner Dilemma type situation becomes more obvious once the economics of the situation are analyzed. It is obvious the most beneficial outcome would be for every single country to implement a carbon tax of the same price so that no country loses its competitive advantage, and to reduce worldwide emissions. However we are currently in the prisoners dilemma where most utility maximizing countries don’t want to damage their competitive advantages with respect to trade, and hence are implementing either extremely conservative policy, no polices, or policies that will obviously not work. Each country is pursuing the strategy that will give them their best outcome, and given the post GFC global downturn in economic activity, anything seen as hindering already poor economic growth is not optimal. There is an incentive to undercut countries and not implement a viable climate change policy to gain the benefits of trade and also the benefit of reduced worldwide emissions without contributing. Not implementing climate change policy is a dominant strategy, and it is leading to a sub-optimal outcome, i.e. the Nash equilibrium is (no Carbon Tax, no Carbon Tax) if the players are Australia and all other countries.

There is a big issue at hand and a solution to reduce emissions. The fact that some governments around the world aren’t addressing it with an easy solution does appear to confuse and anger members of the population. Prisoner’s dilemma explains what appears to bizarre irrational behavior, is actually the opposite, rational behavior. The solution? Globally align climate change policy. Can this be done? Maybe, but politically it is very hard to do.  

 

By Richard Halabi

The 2015 BEcon Guide! 

The last few months have been a sea of darkness. Internships, travel, part-time jobs, or summer semester have lead you to foreign shores and strange tides alike.

Trouble is on the horizon. A reef of course selections and sign-ons threatens you with shipwreck. In order to guide you past these obstacles, a BEcon shines.

The UQES is proud to present the 2015 edition of The BEcon Guide, a subject guide for all Bachelor of Economics courses. This guide provides:

- Marking breakdowns

- Course overviews

- A cost/benefit analysis of each course

- Helpful tips

May the BEcon shed light through rocky courses!

Click here to download the latest BEcon Guide!

The Economics of Sign-ons  

There is nothing quite like sign-ons to disrupt your uni holidays. We’ve all had the experience of waking up at 6am and desperately refreshing my-SI net in the hopes of securing the class we want. It only takes missing a sign on once, and having a bad timetable all semester, to show you how high stakes of a game it is.

So why is it that sign-ons are so competitive and does it need to be that way? Sign-ons try and allocate the strictly limited number of class places to the students enrolled in a course. Or in microeconomics terms, meet the class demands of students with the limited supply of available places. The issue arises when classes considered to be desirable, usually by virtue of being at a convenient time, have demand that far exceeds their supply.

Whether or not they realise it, students effectively compete in a game to determine who gets these coveted places. If everyone agreed to sign on at midday, then the exact same outcome could occur and no one would have to wake up early. But in reality, this doesn’t happen because there will always be an incentive for individual students to undercut the others and try and sign on slightly earlier, securing their place in the class. In Game Theory terms, signing on early is the dominant strategy and the problem is a ‘Prisoner’s Dilemma’. A Prisoner’s Dilemma is a common situation in which each individual pursing their best strategy leads to a sub-optimal outcome. In this case, each person wanting to sign on before the other students leads to a situation where everyone is forced to wake up early and sign on as soon as possible.

In a sense, the current sign-on system is inefficient in that no consideration is given to how much student’s value particular classes i.e. there is no saying that the individuals who get a specific class are the ones who value it the most. Sure, you can be organised and not miss the sign-on but that doesn’t mean that the class you desperately want isn’t filled up by people who have little preference for which class they attend. Let’s face it, there’s a heavy element of chance here – who’s going to remember the sign on, be at their computer, have internet access and be sober enough to tick a few boxes. In theory, a system in which classes are automatically assigned based on each student listing several preferences could be more efficient. Admittedly, this creates a more complicated system for the university, but it does potentially leave more students more pleased with their timetables. For now, it seems that sign-ons are here to stay, so good luck, and at the very worst there will be a whole lot of students you can complain with.

By Nick O'Hara

The Economist Who Stole Christmas 

Let me start by getting something off my chest. I hate Christmas! After years of receiving unwanted presents, Christmas has always been a source of disappointment. Now, after studying economics my disdain for this event has grown. This is because I have now realised that Christmas is inefficient. No other word is as painful in economics.

So how inefficient is Christmas? A study by Joel Waldfogel in his 1993 paper “The Deadweight Loss of Christmas” has revealed that “between one tenth and a third of the value of holiday gifts is destroyed by gift giving”. Given that the Australian Retailers Association is predicting “national sales of $45 billion in the six weeks before December 25”, this Christmas spending will result in a deadweight loss of billions to the Australian economy.

In a perfectly efficient market, consumers make the best decision regarding their own consumption and saving. However, at Christmas people award gifts to each other and, in effect, individuals do not have a choice about the gift that they will receive. This means that, unless you are given something that you would have bought anyway, you will receive a suboptimal outcome. An example of this occurred when I received a $30 book a couple of years ago. Whilst I was happy with this present, I would not have spent anything more than $20 for it. This means that there was a deadweight loss of $10 from this present.

So what is the solution to this problem? The simple exchange of money at Christmas. This allows consumers to adapt their budget constraint to their net exchange of money. As a result, individuals have the opportunity to maximise their utility by choosing the best consumption bundle available. Another solution involves signalling what presents you would like in a Christmas Wish List as this mitigates the information asymmetry between the giver and recipient. Yet another way to minimise inefficiency is through the giving of gift cards. This has become a popular trend in recent years as it allows people to choose gifts that they desire whilst the practice maintains the sentimentality of giving a gift. However, this is still inefficient as the recipient’s choice is restricted to the gift card merchant.

The obvious exception is Santa. As the benevolent ruler of the North Pole, he distributes his wealth in the form of foreign aid to children around the globe. This generous act maximises children’s utility around the globe.

So therefore, unless you are receiving gifts from Santa, I hope you will be sharing my dislike for Christmas as an economist can never justify a deadweight loss.