Economic Precautionary Principle - Assignment Example

ECONOMICS CASE STUDY: THE PRECAUTIONARY PRINCIPLE By Student’s Names Code + Course Name Professor’s Name University/College Name City, State Date Question one Precautionary Principle This is a strategy that was developed to cope with various types of risks where scientific knowledge is still not able to explain the effect of accepting or rejecting the risk. Such risks include the risks brought about by genetically modified organisms, systemic insecticides and nanotechnology. Hence, the principle advocates for choosing a set of actions that significantly reduce the morally unacceptable harm involved and guarantees the most positive feedback. The morally unacceptable harm in the environment include actions that are harmful to the individual’s life or health, cannot be reversed easily, do not consider equity in both the present and future generations, or actions imposed without the consideration of the human rights of those directly affected. In employing the precautionary policies, a number of weaknesses are realized. First, policy makers face a dilemma in trying to come up with the best precautionary policies due to the dynamism of the economy. A policy formed in order to avoid risks in one sector may end up creating a risk in a different sector. Secondly, regulations almost always end up creating new risk profiles rather than reducing the risk they were formulated to prevent. Furthermore, the process of creating policies should be a low budget process compared to implementation costs of the policy. This is especially important in the tradeoff between health and wealth. In addition, formation of proper policies requires empirical data that is not readily available and is expensive to collect. However, channeling resources towards data collection means redirecting resources from other important sectors hence slowing down growth in the economy (Sandin 1999, pp. 902). This article, therefore, focuses on the weaknesses of formulating precautionary principles and the effect of these principles on different sectors of the economy (Sunstein 2005, pp. 2-6). Question Two Precautionary principle states that in the event an action or policy is harmful to the rest of the society and in the event of lack of scientific research on the said action, then the burden of proof that the event or policy is harmful rests with the decision makers. The decision made on the policy will only be revised when scientific research has been conducted, and conclusions drawn that are different from the set policies. Therefore, in the absence of scientific evidence, it is the duty of decision makers to protect the public from any exposure to harm. The application of the principle is mandatory in some countries. Nations where the principle has been applied include Japan, Western USA and Australia. Japan tried to use the suggestions in World Trade Organization (WTO) agreement in the Sanitary and the Phytosanitary measures case. This agreement by the member states of the WTO sets standards on different foodstuff produced and exported by the member states. Japan was required to test its fruit exports for coding moths that were not common in Japan (Gehring & Cordonier 2005, p. 158). However, the introduction of this moth had the potential of being extremely dangerous. The suggestion of the USA at the time was that the process of testing each variety of fruit against the moth was unnecessary and burdensome. Therefore, it was not necessary for Japan to undertake all the initial scientific procedures but rather use conclusions arrived at by other nations to make policies concerning its products (Gehring & Cordonier 2005, p. 158). On July, 2005 in San Francisco, Western USA, the precautionary principle of purchasing ordinance was passed into law requiring the city to weigh its health and environmental cost for its $600million annual purchases that covered a wide range of purchases from cleaning equipment to computers (Mclean 2010, p. 88). In Australia, Telstar Corporation Limited vs. Hornsby Shire Council [2006] NSW 133 was a case that had exceptional elements of the precautionary principle (Peel 2007, p. 105). The most important findings by Justice Preston who presided over the case were that: (1) threat for serious irreversible environmental damage had to provoke five important factors: the threat’s magnitude, the threatened environment’s perceived value, whether there is a rational or scientific base being considered and the level of public participation, (2) a given proportionate precautionary measure should be taken into consideration to avoid the anticipated damage to the environment, (3) the principle should not be applied to avoid all risks, and (4) the burden of proof is shifted by the principle to the decision maker (Peel 2007, pp. 104-110). I am in agreement with Sunstein on his analysis and conclusions on the precautionary principle. First, it is because the author clearly outlines the dilemma that exists between policy makers as they try to incorporate this principle. The dilemma is attributable to the dynamic nature of societies and the difficulty in determining the tastes and preference of each member of the community and satisfy their needs. Precautionary policies are considerably inconsistent, and risks are very uncertain. By reducing risks in one policy, the policy maker may be increasing risks in another policy. Secondly, from his presentation, the author tries to find solutions to the risks created by policy makers in making precautionary principles. He correctly argues that in order to lessen the risk, the policy makers could reason that the existing risks are acceptable while the new risks should not be accepted. Another possible argument is that the precautionary policy erodes innovation. This is because of the risk averse nature of the society that scrutinizes every invention carefully before being able to fully accept them. An important ingredient for innovation in the past has been the ability to risk introduction of a new product in the market and judge the reaction of the population to the product. However, with this policy, policy makers want to test each product coming into the market against its performance in other markets. Due to lack of such information and due to the fear of the expense of reversibility, policy makers shy off from these new inventions and stick to what they trust. Furthermore, a society cannot live in a risk free environment otherwise an attempt to do so can end up paralyzing the entire economy. The author clearly illustrates this by using an example of banning air travels in order to avoid air disasters. He notes that while using cost and benefit analysis does not guarantee the optimal expected results, it works as a guideline to a principled approach of decision making for policy makers (Arrow et al. 1996, pp. 221-222). Question three Energy industry Precautionary principle acts as the basis framework that can be translated into energy management and protection of energy sources. The principle seeks to reverse the burden of proof such that those who have been put into the pole position of ensuring continuous growth within the energy sector do so while avoiding environmental pollution. It is, therefore, the responsibility of the policy makers to ensure clean energy extraction and how the energy is used in efficient ways. This is a step away from the permissive regulatory approach where a particular activity is allowed to go on until evidence of environmental degradation are witnessed. In most occasions, the damage usually occurs unexpectedly or when it occurs it is usually irreversible (Arrow & Fisher 1974, p. 313) Precautionary approach deviates sharply from the permissive approach. Therefore, it has been often referred to as a barrier to science approach. Many who are of this view often take the ‘low risk ‘perspective where the available information is used to obtain highly imperfect probabilistic factors (Graham & Hsia 2002, p. 380). Risk based approaches, however, tend to often equate “absence of evidence” with “evidence of absence” (Graham & Hsia 2002, p. 380). In most cases, absence of evidence usually shows the limitations of scientific methods in detecting quantitative aspects. Therefore, the continuous overreliance on the absence of evidence is not a scientific approach. Formulation and implementation of precautionary policy requires that damage to the ecosystem be avoided at all cost and should be focused in avoiding and preventing harm. Moreover, in order to detect actual or potential impacts, high quality scientific research need to be conducted. In addition, social, economic and technical development create a progressive reduction in the environmental burden when compared to other contemporary baselines. Therefore, it is not easy to overcome the various complexities that are encountered when managing technological skills relative to the entire system. In addition, science alone is not sufficient when policy making relies on the best scientific method. Thus, the precautionary principle has gained endorsements from various international bodies. These include OSPAR convention, the London Convention, the Barcelona convention, the Stockholm convention and the UN Agreement on high seas and fishing. The policy also pushes for the signatory members to aim towards zero emissions of radioactive material (Arrow & Fisher 1974, p. 314). Therefore, precaution principle seeks to achieve clean energy production. However, the biggest challenge comes in when analyzing the cost and benefit of such energy extraction. Many countries fail to agree on what is clean energy and what is not. In places like China, the traditional source of energy has been nuclear while some countries struggle to do away with their nuclear stock due to the high cost of disposing the fuel rods (Zhong 2000, p. 142). Consequently, if countries turn away from relying on nuclear power, then they will turn to fossil fuel and thus this will lead to a rapid depletion of fossil fuel reservoirs, something against the will of many nations. Therefore, it is in situations like these that the policymakers have to stand and decide the best route their country should take (Zhong 2000, p. 143). Pharmaceutical industry Countries have varying policies they employ when purchasing drugs from foreign countries. Some countries prefer to stick to the traditional medicines they usually import and will not easily turn to other unproven brands. With the evolution in technology, different types of drugs that treat similar diseases have been introduced to the market. In some instances, cheaper versions have been introduced to target specific markets where the pharmaceutical companies feel they can establish a customer base and also offer their customers products within their budget limits. Despite these attempts, a number of countries are not willing to accept these generic drugs due to various skepticism, majorly the fear of long –term side effects of such drugs. Other policy makers are not willing to try out different lines of drugs due to the fear of being used as test subjects by pharmaceutical companies (Graham & Hsia 2002, p. 380). Therefore while protecting their citizens from potentially harmful drugs, the policy makers could also be protecting them from potential benefits due to excessively stringent measures that they may have put in place. This can lead to a trade-off between the health and wealth of individuals in the society. Thus, one will either save on wealth and risk the health of people in a country or allow any number of drugs into the market and risk exposure of its citizens to untested products within the market (Peltzman 1973, pp.1051). The dilemma faced by the policy makers may not be easily handled. However, various strategies can be employed to overcome some of these challenges. First, countries can join trade agreements set by renowned bodies like the WTO's Sanitary and Phytosanitary measures. In such agreements, specific standards of production are set for export goods so that the goods do not have to be tested again once they arrive at their desired destination since this proves to be costly most of the time. Also, constant awareness campaigns can be conducted among the policy makers so as to get them exposed to the variety of relevant products and methods of production within their respective area of expertise. Awareness as to how different groups manage risks can help policy makers develop a more conclusive framework on how to prepare for and manage different scenarios as they occur. Lastly, interactive engagement with those whom the policy are meant to protect also helps the policy makers to know what is better suited for the entire population. It is not possible to draw the utility curve for an aggregate population due to very different preferences but with the knowledge of people’s taste and preferences, a pareto-optimal point of consumption can be determined where all individuals stand to benefit. Question four. Perfect competition This is a market in which individual participants are not large enough to affect the prices in the market. The action by one firm does not draw a reaction from the other firms. Hence the firms in this market structure are price takers. All the firms in perfect competition produce where the price of a unit of production is equal to the cost of producing an additional unit of that good i.e. P=MC. Hence, perfect competition is a pareto-optimal condition of production since the resources within the economy are distributed in a balanced proportion among the different players and an increase in resource to another party leads to others being worse off. This market has characteristics such as; a large number of buyers willing to purchase a given commodity at a given price and a large number of sellers who are willing to produce a given commodity at a given cost of production; no barriers of entry or exit which makes it easy for firms to enter the market to take advantage of any economic profits within the market and also exit the market when they are making losses. Other characteristics of the market include; perfect information where both consumers and producers are assumed to have perfect knowledge about factors in the market such as prices, utility methods of production and quality of the products. The purpose of the firms in this market is also to maximize their profit levels by maximizing their total revenues and minimizing their total cost. Furthermore, this market assumes perfect factor mobility within the economy and zero transaction costs between buyers and sellers (Choudhury 1999, p. 121). Conversely, precautionary principle deals in the protection of the society in cases where certain actions may harm the society but with no scientific backing of such a claim. Different processes, methods of production or products may be disallowed within the economy due to the belief that they can harm the society’s welfare. Therefore, the precautionary principle does not compliment perfect competition because firstly; players in perfect markets enter into productions that maximize their returns. However, due to the limitations of the principle, the choice of what to produce is restricted as producers cannot engage in some forms of production. Secondly, the pareto-optimal condition that exists in perfect markets is no longer guaranteed in precautionary principle. Resource allocation within the economy is distorted as precautionary policies are implemented and, most often, resources channeled towards the production of supplementary goods that are considered safer. Therefore, other producers end up being worse off in the market and opt to exit the market. Thirdly, in perfect markets, the forces of demand and supply determine the price levels of commodities within the market. Prices are equated to the cost of producing an additional output. However, precautionary policies give preference to social welfare and, therefore, the set prices are the ones that are most favorable to members of the society. Furthermore, valuation of the benefits of a project is done using the social cost-benefit analysis. Question five An intricate interplay of policies that failed to yield as per expectations caused the global financial crisis. A major cause of the crisis was the bursting of the United States housing bubble (Dolezalek 2012). After the Russian debt and Asian financial crisis, most investors shifted their investments to the United States. The huge capital inflows created expectations of high housing prices and, therefore, lending rates dropped to attract more investors. Consequently, it was easy for consumers to obtain different types of loans e.g. credit card, mortgage and auto loans and; therefore, they accumulated unprecedented debt load. This was not assisted by the presence of shadow banking practices within the US that encouraged unscrupulous money lender to also act like banks (Dolezalek 2012). The presence of Mortgage Backed Securities and collateralized debt obligation encouraged investors and institutions all over the world to invest in the United States (Dolezalek 2012). However, unlike earlier anticipated, the housing prices began to fall. As a result, homes were worth less than the mortgage loans leading to foreclosures. This became an epidemic, and with time, it weakened the financial strength of financial institutions. Customers defaulted on their loan repayments and soon the crisis spread to other institutions and globally (Dolezalek 2012). In order to maintain their stability after the financial slump, different nations introduced measures to avoid a repeat of the financial melt-down. For example, in the U.S, in order to attract more investors, banks were previously deregulated. This led to the creation of mini-banks referred to as shadow banks that easily tricked people into borrowing. However, later investigations by the Senate revealed that stringent regulation measures would have enabled the early detection of the melt-down and the crisis would have been avoided in time. Therefore, regulations were introduced in order to keep the financial institutions in check (Wiener 2002, p. 322). Such actions that monitor financial institutions may prevent any future melt-downs since banks are obliged to share their financial information with the federal government. Different trends can then be analyzed in order to determine if the movement of the economy is towards the projected region and adjustments made where necessary. Also, the federal government can monitor lending rates across different banks and advise on the optimal lending rates. The success of these policies depend on how they are implemented since the forces acting on the financial markets are of a dynamic nature, and constant monitoring is significant to ensure that the rules are not too stringent to ward off investors or too sublime to lead to another meltdown. Reference List Arrow, KJ, Cropper, ML, Eads, GC, Hahn, RW, Lave, LB, Noll, RG, Portney, PR, Russell, M, Schmalensee, R, Smith, VK, Stavins, RN 1996, Is there a role for benefit-cost analysis in environmental, health, and safety regulation?, Science, no. 272, pp. 221-222. Arrow, KJ & Fisher, A 1974, Environmental preservation, uncertainty, and irreversibility, The Quarterly Journal of Economics, vol. 88, no. 2, pp. 312-319. Choudhury, MA 1999, Comparative economic theory: occidental and Islamic perspectives, Kluwer, Boston. Dolezalek, H 2012, The global financial crisis, viewed 5 April 2014, Gehring, MW & Cordonier, MC 2005, Sustainable development in world trade law, Kluwer Law International, The Hague. Graham, J & Hsia, S 2002, Europe’s precautionary principle: Promise and pitfalls, Journal of Risk Research, vol. 5, no. 4, p. 380-394. Mclean, L 2010, The force: Living safely in a world of electromagnetic pollution, Scribe Publications, Carlton North. Peel, J 2007, When (Scientific) rationality rules: (Mis)Application of the precautionary principle in Australian mobile phone tower cases, Journal of Environmental Law, vol. 19, no. 1, pp. 103-120. Peltzman, S 1973, An Evaluation of consumer protection legislation: The 1962 drug amendments, Journal of Political Economies, vol. 81, no. 5, pp. 1049-91. Sandin, P 1999, Dimensions of the Precautionary Principle, Human and Ecological. Journal of Risk Assessment, vol. 5, pp. 889-907. Sunstein, CR 2005, The precautionary principle as a basis for decision making, The Economists’ Voice, vol. 2, no. 2, pp. 1-9. Wiener, JB 2002, Comparing precaution in the United States and Europe, Journal of Risk Res, vol. 5, no. 4, pp. 317-349. Zhong, L 2000, Nuclear energy: China's approach towards addressing global warming, Georgetown. International Environmental Law Review, vol. 12, pp. 485-499. Read More