1. The Environment
The market for natural resources: These
are the nonproduced resources with which a society is endowed.
Teaching Strategy: Compare and contrast nonrenewable (exhaustible)
resources, such as oil and coal, with renewable (nonexhaustible) resources,
such as timber and fish.
Teaching Strategy: Discuss
how the supply curve of these resources is positively related to the market
price and how the supply curve can shift over time. Cite Figure 1 using oil
as your example. Discuss how the equilibrium price is determined by demand
and supply together. Carefully explain how the owner of the resource decides
to extract and sell the resource today or leave it in the ground for future
use. Center your explanation on whether the present value (PV)
of extracting and selling now exceeds the PV of
leaving the resource in the ground.
There is also a market for renewable resources.
An example of a renewable resource is timber; the amount of timber is sufficient
to enable the resource to renew itself at a rate that satisfies the present
and future needs of society. The renewable resource market determines the
price of a quantity of a renewable resource used now.
Teaching Strategy: Explain
how current interest rates affect the rate of tree harvesting by a logging
Externalities are benefits or costs borne
by someone not involved in a transaction.
Negative externalities, or social costs,
are such costs.
Private costs are costs borne by an individual
involved in the transaction that created the costs (internal).
a factory polluting the air as an example of social costs.
Private property rights are necessary
for the functioning of a market. Market failures result from the absence of
well-defined property rights.
the example of pollution caused by auto emissions presented in the text, utilizing
Figure 2. Stress that the externality originates from no one owning the air
or the ocean or the river.
2. Illicit Drugs
Solutions to environmental problems
In the United States, the Environmental Protection
Agency (EPA) defines the emission standard, which is the maximum level of
pollution allowed from a source. The EPA allows a firm a maximum level of
total pollution, and the firm can choose among the least expensive controls
to operate under. In emissions offset policy, a firm purchases a permit to
pollute. If the entire permit is not used, the firm can bank
the permit for future use or sell it to another firm. The government can reduce
the number of permits or increase the permit price to regulate the market.
Teaching Strategy: Remind
your students that the EPA assigns private property rights to firms by allowing
a firm a maximum level of total population. Such rights can then be bought
and sold in a market, which is referred to as a smog market. Ask students
how pollution rights should be allocated.
Global problems occur because pollution
generated in one country can affect another country. Control of such pollution
necessitates international agreements.
Teaching Strategy: Cite the example of the hole in the
ozone layer and the international agreement to lessen the use of chlorofluorocarbons.
Note that the United States has refused to sign any international agreements.
This is a very interesting market to use to
illustrate to students how markets function. Stress that 60 percent of all
illicit drugs consumed in the world are consumed in the United States. As
a result of this, the illicit drug prices are heavily influenced by the amount
of transactions taking place in the United States.
In the illicit drug market, there are
two types of consumers, addicts who are price elastic and experimental users
who are not, and two types of suppliers, one for heroin and cocaine and another
for the so-called designer drugs. Since the cost to the supplier is the same
in each customer market with different price elasticities, the supplier would price discriminate.
Teaching Strategy: Carefully go over Figure 4 to illustrate
the price discrimination. Emphasize that it is not difficult to enter the
designer drugs market compared to the cocaine and heroin markets because there
are only a few suppliers in the latter markets who cooperate by establishing
In the War on Drugs, governments can
temporarily influence the market through regulations and other types of enforcement,
which increase the suppliers cost. The outcome is higher prices and
lower quantities. Since the government cannot maintain such enforcement due
to budget considerations, the best policy for government is to work on the
demand side of the market, rather than on the supply side.
Teaching Strategy: Use Figure 5 to illustrate how governments
can influence the supply side of the market.
Some governments have a free drugs
policy. For example, the Swiss government provides free drugs to users.
Teaching Strategy: Debate
in class about the pros and cons of having a free drug policy.
The designer drugs market can easily
be affected by government via market regulations such as licensing suppliers
and imposing a tax; but this will have an impact only in the short run. A
better solution to the problem lies on the demand side. Governments should
design policies to educate the consumers about the negative effects of drugs
Teaching Strategy: Ask
your students what they would recommend the U.S. government do on the demand
side to encourage drugs users to consume less.
4. Minimum Wages
Discrimination exists when factors
unrelated to a workers performance acquire a negative or positive value
on the labor market.
Strategy: Use Figure 6 to demonstrate how a firm can charge a higher
price if a certain group of consumers would like to be served by a preferred
group. In this example, discrimination requires paying a premium to associate
with certain groups.
Statistical discrimination can occur
when an individual is not hired because of her or his education, experience,
age, or test score.
Strategy: Cite an example, say, of a firm not hiring people older than
go over Figure 7 to show that the effect of minimum wages, above market wages,
is to reduce employment. Stress that a minimum wage has the greatest negative
impact on unskilled workers.5. Income Inequality and Poverty
The Lorenz curve is a picture of how income
is cumulatively distributed among members of a population. It is used to measure
income inequality.Teaching Strategy:
Figure 8, and stress that the 45-degree line shows perfect income distribution
equality, the Lorenz line shows actual income distribution, and the difference
between the two lines shows the degree of income distribution inequality.Teaching Strategy:
that income distribution among countries is very diverse. Cite Figure 9, and
indicate the profound differences in per capita incomes between Mexico and
the United States.
Poverty in a country must be measured
in a way that permits a comparison of the income levels within that country
with those in other countries.
Strategy: Explain how someone who is comfortable in Ethiopia would
be considered impoverished in the United States. Cite Table 1 as evidence.
Teaching Strategy: In
2000, more than 31 million U.S. residents lived below the poverty line. The
primary reason for poverty is unemployment. Discuss Figure 10, which illustrates
the percentage of people in the United States who were below the poverty line
between 1960 and 2000.