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Fundamentals of Economics , Third Edition
William Boyes, Arizona State University
Michael Melvin, Arizona State University
Lecture Outlines
Chapter 8: Social Issues

1. The Environment
  1. 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 firm.

  2. Environmental problems

  • 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).

Teaching Strategy: Cite 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.

Teaching Strategy: Cite 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.

  1. 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.

  2. 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.

2. Illicit Drugs
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.

  1. 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 drug cartels.

  2. 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.

  3. 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.

  4. 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 on society.

    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.

3. Discrimination
  1. Discrimination exists when factors unrelated to a workers performance acquire a negative or positive value on the labor market.

    Teaching 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.

  2. Statistical discrimination can occur when an individual is not hired because of her or his education, experience, age, or test score.

    Teaching Strategy: Cite an example, say, of a firm not hiring people older than 55.

4. Minimum Wages
Teaching Strategy: Carefully 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: Draw 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: Note 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.

  1. 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.

    Teaching 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.