Assignment Code: MEC-008/AST/2022-23

Course Code: MEC-008

Assignment Name: Economics of Social Sector and Environment

Year: 2022-2023

Verification Status: Verified by Professor

Answer all the questions.

Section A

Answer the following questions in about 700 words each. 20x2

Q1) Explain the role of ‘natural resources’ in development.

Ans) The absence of particular natural resources hinders emerging nations' ability to move forward with their development. Natural resources are seen as a gift from nature and are the only universally applicable means of production. They are also essential for sustaining society's creative activities. The whole amount of resources a country has comes from its ancestors.

Natural resource utilisation is heavily influenced by the type and level of technology. Natural resources are essential for producing food crops and other naturally occurring foods, but they can also help developing nations generate foreign exchange through mineral exports. Due to their reliance on extractive industries like mining, agriculture, and fisheries, developing nations are experiencing a resource shortage. However, some of these nations have been able to overcome the limitations of natural resources with the aid of technology. Japan and Korea show that the limitations imposed by a lack of resources can be overcome with the development of technology and other institutions.

Renewable Natural Resources

Renewable natural resources are those that have the ability to produce themselves. Renewable natural resources include water, air, solar energy, and anything else that is a component of the atmosphere. To generate commodities, they work in tandem with labour and capital. Resources like fish and forests may be replaced and are renewable. Renewable resources are viewed as limitless and interchangeable among different species.

For instance, as long as there are sufficient fish stocks overall, one stock of fish can be replaced by another. Therefore, policymakers would concentrate on the type of the fishing industry's production function to determine the quantity of labour and capital required to raise a specific amount of fish stock.

Numerous types of renewable resources cannot be replaced at the rate they are being used up due to the intensifying usage of natural resources, which is why there is a fear that they may be destroyed or go extinct. Recent years have seen an increase in worry about the biodiversity being lost due to the loss of numerous flora and fauna species as well as the depletion of numerous fish species. A number of global action plans have been developed to safeguard the threatened species. In this setting, preserving nature's diversity and ensuring the survival of numerous plant and animal species have taken on increased significance.

Non-Renewable Natural Resources

Some natural resources are non-renewable and will run out if used extensively. In other words, the quantity of non-renewable resources is fixed. Utilization and usage of such resources for policy makers depends on the market's structure and pricing function. The amount that non-renewable resources are used in society depends on their life cycle, price, and utility. Market structure becomes particularly significant for such resources. Cartel formation is common in several metals and commodities, including bauxite, copper, and oil. In this perspective, an illustration from the global petroleum business is appropriate.

The nations that produce oil make up the Organization of the Petroleum Exporting Countries, an international group founded in 1960. Due to the huge market share controlled by the cartel and the relatively rigid demand structure, studies have demonstrated that there are significant benefits from cartelization in the case of petroleum and bauxite. Additionally, apex bodies are increasingly being established on a global scale to monitor the costs and supply of certain commodities. The cost of extraction technology and cumulative resource depletion are other factors that affect the market price of a non-renewable resource.

Q2) Discuss the concept of ‘health insurance’ analysing its interacting effect on healthcare market.

Ans) The demand for and supply of healthcare, as well as the government's involvement in resource allocation, are all impacted by health insurance. When an insured person becomes ill owing to covered reasons, the insurer covers the associated medical expenses. This is a form of "cost sharing." The insurer could be a public or private institution. Private medical insurance is a key component of market-based health care systems.

In industrialised economies, the idea of health insurance is more relevant. In developed nations, the majority of people do not directly pay for their medical care. Instead, a large amount of medical care is covered by insurance companies, with the customer footing the majority of the bill. The provision of insurance coverage is made possible by the payment of premiums or taxes. Although it's not always the case, the consumer frequently pays the premiums by working.

The theory of anticipated utility and its underlying principles of marginal benefit and cost are central to the idea of health insurance. The level of insurance coverage a person is prepared to purchase at reasonable costs is represented by the demand for health insurance among customers. If the premium decreases, additional insurance coverage will be bought. Accordingly, the optimal amount of insurance will be purchased when, other factors being equal, the consumer's marginal gain from the greater coverage equals the cost of purchasing that insurance.

The factors influencing insurance buying have an impact on the demand for health insurance. The typical presumption used in demand analysis is that each individual wants to maximise their utility. A person chooses between the two options in order to maximise expected utility because they do not know how their disease will impact them or how much money they will need to lose in order to pay for it. 

1. In exchange for a minor loss in the form of the insurance premium, he can buy insurance.

2. He has the option of self-insuring, which involves weighing the huge likelihood that the medical loss won't materialise against the significant possibility of facing a little loss in the event of disease.

Demand for Health Care in the Presence of Health Insurance

Understanding the need for health insurance helps to explain why some people choose to protect themselves against certain medical losses while others choose not to. This implies that not everyone is a risk avoider. Understanding the different health care expenses that drive up the cost of health insurance is crucial. Hospitalization and surgical costs are much more likely to qualify as high expected loss instances, although presumably having a low possibility of occurring.

Medical care expenses including doctor visits at home or in the office, eye exams, prescription medications, and dental work are generally less expensive and are therefore thought to be manageable without insurance. According to the way that health insurance is demanded, it should be determined whether each type of medical care has enough health insurance coverage independently. So, even if someone avoided risks, we wouldn't expect him to purchase health insurance to cover all of his medical requirements. The cost of insurance shouldn't be so expensive that it leaves people worse off because the benefits outweigh the costs.

The availability of health insurance may encourage moral hazard in a person's need for medical care. Moral hazard causes people to want more healthcare than is actually necessary when they have health insurance. The individual compares the marginal advantage of acquiring additional units with the marginal benefit of purchasing health care. Insurance coverage, on the other hand, which makes the cost zero demonstrates ineffective utilisation of medical resources. Moral hazard implies that even while people who have insurance tend to need more medical services, they may still be reluctant to buy an insurance policy that offers such comprehensive coverage. A person may choose to self-insure or buy a less comprehensive insurance policy rather than paying the hefty premium that typically comes with such extensive coverage.

Section B

Answer the following questions in about 400 words each. 12x5

Q1) Explain the concept of Pareto optimality. Why is it an important criterion?

Ans) Most of the analysis of economic theory has been centred on the market economy. Individual consumers in market economies have ownership rights to various assets and are free to exchange these assets for other assets or items in the marketplace. Similar to this, businesses which are themselves owned by consumers choose their manufacturing strategy, trade in the market to obtain necessary inputs, and then sell the finished goods. A market equilibrium, also known as a competitive equilibrium, is the result of an economy where each agent is doing the best she can give the activities of the other agents.

A Pareto optimal is a possible allocation that provides at least as much benefit to all customers and greater utility to at least one of them than any other feasible allocation. According to the efficiency principle known as Pareto optimality, one person's financial condition can only become better if another person's gets worse.

Fundamental Theorems of Welfare Economics

The two core hypotheses of welfare economics are now covered. The First Fundamental Theorem of Welfare Economics is the name given to the first of them. It offers a set of conditions that guarantee a market economy will provide a Pareto-optimal result. As stated by this theorem:

1. If there are sufficient markets, that is, if every relevant good is exchanged at prices that are known to the general public.

2. If every consumer and producer exhibits competitive behaviour.

3. If an equilibrium does exist, it will have a Pareto-optimal distribution of resources. This means that any competitive equilibrium is unavoidably Pareto optimum when markets are fully developed.

Adam Smith's claimed "invisible hand" attribute of the market is confirmed formally and broadly by the finding that competitive marketplaces will always provide a Pareto optimum solution. According to the Pareto criterion, equilibrium price signals are adequate to coordinate decentralised economic activities, according to the first theorem of welfare economics.

Each economic agent responds to prices by equating her marginal rates of substitution and transformation to these prices through her individual maximising behaviour. Since every agent deals with the identical pricing, equilibrium marginal rates are all equal to one another. These equalities define Pareto optima in a convex setting along with market equilibria.

Q2) Bring out the modifications suggested in SNA to account for the use of environmental resources.

Ans) The United Nations Satellite System of Integrated Environmental and Economic Accounting and the Environmental and Natural Resource Accounting Framework are two examples of such a methodology. Both methods focus on the management and score-keeping aspects of accounting and call for sector-specific data on the utilisation of environmental assets. The SEEA redesignates the elements in other volume modifications such that they are taken into account in the NDP calculation in an effort to get around the constraints of the SNA.

The United Nations Statistical Division approved the satellite System of Integrated Environmental and Economic Accounting framework rather than changing the core SNA because there was no international agreement on how to include environmental assets and the costs and benefits of using them in national accounts. The satellite network serves as a conduit between the SNA and the accounts of the natural world. The primary reasons for SEEA's success are the SNA's close integration with it and its capacity to remedy numerous shortcomings of traditional national accounts by using alternate versions or modules.

The SEEA's primary goals are:

1. All environment-related flows and stocks in conventional accounts are separated and elaborated. The goal is to present environmental protection expenses individually. These expenses have been viewed as defensive spending since they are part of the costs required to offset the negative effects of economic expansion.

2. Linking of physical accounts to financial accounts, balance sheets, and environmental records. It consists of a description of the physical interactions between the economy and the natural environment. These accounts offer the material counterpart to the SEEA's financial stock and flow accounts.

3. The SEEA expands and complements the SNA in terms of allocating costs to the use of natural resources in production and final demand as well as changes in environmental quality brought on by pollution and other production, consumption, and natural disaster-related effects on the one hand, and expenses for environmental protection on the other.

4. The SEEA expands the definition of capital to include both natural and man-made capital. Natural capital consists of limited renewable resources like tropical or marine forests. resources that are not replenishable, such as land, soil, and subsoil, as well as cyclical resources like air and water.

5. SEEA's modified macroeconomic aggregates can be calculated by factoring in the expenses associated with resource depletion and changes in environmental quality.

The evaluation of environmental resources is necessary for the third, fourth, and fifth purposes indicated above. SEEA offers three alternative versions based on various valuation approaches to help with this. One SEEA variant uses a market valuation strategy.

Q3) Illustrate the difference between the ‘direct use value’ and the ‘indirect use value’ of environment with an example.

Ans) Plants are the primary source of food that may be lawfully harvested and consumed; therefore, they immediately encourage sustainable development. In some conservative communities, different plants and animals are revered and treated as holy and sacred, which creates an abnormal incentive for variety.

Q4) Why is there for a need for regulation in an economy? Explain.

Ans) Essentially, there are two arguments for governmental regulation: public interest and market failure. When there are externalities in the production process, market failure develops. When externalities are present, the exclusion principle might not be completely valid. The production is not at the socially optimal level and the market system cannot capture externalities. Government involvement is required because the private sector does not find it profitable to produce goods with positive externalities. In reality, there is a compelling argument for government provision of pure public goods.

Fundamental Theorems of Welfare Economics

Welfare economics is based on two basic theorems. According to welfare economics' first fundamental theorem, any competitive equilibrium results in an optimal distribution of resources. It is impossible to improve one person's situation without making someone else's worse off if Pareto efficiency rules the economic system. The theorem shows that the market, if left to its own devices, will inevitably achieve efficiency, and supports the idea of the legendary invisible hand that Adam Smith alluded to.

Government Intervention on Public Interest

1. Imperfect Competition: When a producer has market power, there is insufficient competition on the market. As you may remember, when there is ideal competition, price equals marginal cost, but when there is monopoly power, price exceeds marginal cost.

2. Externalities: Externalities imply that costs or benefits are not adequately reflected in prices and other economic decision-making. There are many instances of externalities in our environment, both good and bad. There is never any motivation on the side of the economic agent to limit their equilibrium production or consumption to the amount that is socially optimal.

3. Common Property Resources: In the event of shared property resources, the property rights are not specified. Due to production and consumption activities, forests get destroyed, common grazing ground erodes, and air and water bodies get contaminated.

4. Transaction Costs: The availability of complete information on the parts of both parties engaging into a contract or transaction is one of the fundamental assumptions under perfect competition. Information procurement, which is disregarded in conventional economic theory. Search, measurement, inventory, and decision-making expenses are major transaction costs. Second, when determining the costs of production, it is important to take into account contract enforcement and litigation.

5. Asymmetric Information: The contracting parties may have access to asymmetric information in some circumstances.

6. Adverse selection: Adverse selection may result from asymmetric information. It describes a market process where undesirable outcomes happen as a result of informational imbalances between buyers and sellers.

7. Organizational Failures: The principal-agent issue is a term used in economics to describe the challenge of persuading one party to act on behalf of another. The principle-agent problem occurs when a principal pays an agency to carry out certain tasks that are advantageous to the principal but expensive for the agent, and when there are aspects of the performance that are expensive to watch.

Q5) Outline the consumption versus investment debate in education.

Ans) When a good or service provides satisfaction or utility only once, it is regarded to be under the consumption category; however, when it is anticipated to provide satisfaction only in the future, it is thought to fall under the purview of investment products or services. You might think of investing in and consuming education.

The biggest factor in determining someone's economic and social success is said to be their level of education. Education is viewed as an economic good since everything that meets a person's needs is regarded as a good in the economy. Consumption can be defined as the act of paying the price of a commodity or service and enjoying all of its advantages right away. Consuming education is consuming it as a... show more information.

The higher status in society that was attained, the higher level of education that was attained. This is so that people can become knowledgeable and highly talented, which is why society today views education as a valuable asset in the development of human capital. As a result, even though they are new to the work market, those with higher education will be able to handle the number of people with little education who are present in the labour market. People with higher levels of education are viewed as being crucial to the development of an organisation and are more loyal to their employers than those with lower levels of education. This scenario serves as an illustration of return on education investment.

Individuals will benefit from investing in their education in terms of obtaining higher and unrestricted income levels. Higher education increases the potential revenue. In actuality, education will give a person the knowledge and abilities they need to better himself and the state. Individuals will be able to get a job with a better offer income or they can develop their own careers with a variety of skills and information acquired via education.

Having a good education helps you advance. Education makes for more intelligent, competent, and economically productive people. It offers the chance for career and financial improvement. One of the key elements of progress is education in many senses. Without significant investments in human capital, no nation can have sustainable economic growth. People's understanding of the world and themselves are improved via education. Their quality of life is enhanced, and both the individual and society gain from this in significant ways.