Economics of the Population and the Environment

1. Economics of the Population and the Environment David Zilberman

2. Why Economics? • Economics attempts to understand choices by individuals and groups and to assess these choices. It tries to explain and assess the performance of institutions such as markets, sharecropping, marriage, etc. • Economics has various models at different levels of aggregation. • Micro- and macromodels. • Short-term and long-term models. • Models do not necessarily need to be consistent, especially if choices are not consistent. • One model may explain the optimal choice of a number of children from a long-term perspective. • Another choice of procreative activities from a short-term perspective

3. Economic Choices As Results of Optimization • Samuelson’s main contribution—viewing individual choices as representing optimization subject to constraint. • Maximize objective functions that depend on decision variables subject to a feasible set, given both physical and informational constraints. • The objective function is to frequently maximize a quantitative indicator of happiness, which means increased consumption of things that make people happy. • Food • Children • Sex • Leisure • People are not always optimizing, but they behave “as if” they are, and modeling is “a good prediction of actual outcome.”

4. Constraints of Technology and Information • Constraints may be represented by a “production function” relating inputs to output by resource availability, income, and time. • We have become used to speaking about • Physical capital • Human capital • Natural capital • Social capital • Financial capital. • Frequently they are substitutes, and lack of other forms of capital may lead to exploitation of natural capital. • Sometimes various capital goals are complements,e.g., physical capital may increase productivity of natural capital. • Information including beliefs and basic learning skills are key to choices. Our ability to predict behavior depends on ability to understand information sets.

5. Role of Religion and Traditions • Culture and religion affect outcome in several ways. • They shape preferences and values. People may desire to conform, and their desires and values regarding size of family and/or performance of children, depend on societal and religious values. • They shape behavior about technology and causal relationship. • They set decision rules (thou shall not kill) or constraints. • Education may internalize values and thus shape preferences; it may change the perception of basic relationships and feasible activities.

6. Bounded Rationality • People have a limited capacity to absorb and process data. They may prefer a simple solution. • They may use ad hoc rules or stick with certain patterns that seem suboptimal to reduce mental transaction cost and overcome ignorance. • They may not recall and store information; thus taking a myopic perspective. • They may paint reality in rosier colors (cognitive dissonance) or excessively dark colors, and thus perception may affect policy.

7. Institutional and Political Economy • Economists realize that there may be several parallel institutions that affect resource allocation: market, political systems, and traditional institutions. • Institutional and political structures impose constraints, but also affect preferences and choices. Distributional analysis is crucial to political-economic understanding • Political “horse trading” affects outcomes and links choices in different fields. Population policies may be used as mechanisms to appease certain groups (religious rights), especially if within a political system, population policies may not be of a large importance.

8. Human Capital and Ability to Deal with Disequilibrium • There has been much emphasis on static equilibrium n formal economic analysis. Schultz emphasized the importance of disequilibrium. • Ability to adjust to disequilibrium is a key feature of human capital in modern society. Individuals who have “allocative” skills can perform better in a dynamic society. • Traditional societies are in equilibrium. Allocation rules are perfected, and learning is done by imitation. There is not much use for formal schooling. Children are a source of labor when they learn their skills on the job and there is no need to spend time on learning. • Modern society requires ability to read and do math. Children need to spend time learning to be effective. Using labor as a source of energy has been mostly replaced—engines do the work people once did. • Children are less a source of labor and more a source of expense, so modernization and urbanization lead to drastic reduction in economics of childrearing.

9. Population and Transitions • Schultz emphasized the importance of transitions and adjustment. Systems were in a “steady state” or “sustainable” existence in generation as forces of nature and technology were in balance. Slash-and-burn systems supported a steady population in the tropics for millennia. • New technologies have had conflicting impacts but early stages had to increase population. Increased food system productivity, improved seed varieties and other genetic materials, use of improved machinery, and pest control all contributed to population growth. • Better health services and medical treatment reduce infant mortality and expand life expectancy. • Urbanization and knowledge-based economy serve to reduce population growth.

10. Long-Term Model of Population Size • People make “macro” decisions about populations. A family may think rationally about when and how many children to have. The model here deals with this. It is the long-term “macro” model. • We later will deal with short-term choices that affect population growth as well. • A three-period model consists of: • Childhood. When you go to school or work, but you are controlled by your parents. • Adulthood. When you earn income and support your children and parents. • Retirement. When you consume whatever you get from your children or the government. • Decisions are made by adults. • They decide how many children to have. • What type of education to give them. • Provide income to support parents and taxes.

11. The Adult Decision Problem • In this simplistic model we assume that adults consider benefits from the present and future. Utility is derived from income and children, depending on their number and “quality.” • The utility function of periods 1 and 2—adulthood and retirement—are used to determine key choices. • Utility function is U(consumption = C, number of children = N).

12. In this simple model, the objective is • The optimality conditions is

13. The enjoyment of children and the resources that they generate are weighted against the cost required to raise them. and it is declining

14. Graphical Presentation H W MVC + MFC MVC N* Lower W and higher MFC increase N.

15. Expansion of Model • Nonmonetary cost of childrearing vs. children’s earning. • The utility function may have elements of leisure, and having a higher number of children is time consuming. • We may separate between children’s earning and their cost to raise them. • Therefore, the marginal condition becomes • Childen’s”quality” • Education and attention will improve future earning of children. Thus, one may introduce another choice variable—expense on education. • Then there may be a trade-off between a large number of less educated children and a small number of but stable number of educated economists.