Posts tagged production

California’s Tradable Permit on Oil Refineries

Californian Government Implements Tradable Permit on Oil Production

The Reporter: News Article

According to The Reporter, California decided to implement the tradable permit policy for the production of oil, which is responsible for the global warming. The government has budget deficit of “$9 billion” and it hopes to gain “$14 billion” by 2015, profiting from auctioning tradable permits to the oil companies.

The main reason for implementing tradable permit policy is that there is a negative externality associated with the production of oil. The social cost exceeds the private cost and this makes the society to take care of the environmental cost. In order to internalize the cost of pollution of the oil production and move the quantity supplied from Q market to Q optimum, the Californian government introduced tradable permit.

The government or EPA sets the amount of pollution allowed and auctions the pollution rights (tradable permits) to the oil companies. If the amount of tradable permit is appropriately chosen, it effectively moves the quantity supplied to Q optimum both eliminating the negative externality and increasing the government profit. The government would profit P times Q optimum amount of money.

However, some critics argue that the increase in the price of oil will increase the overall price of consumer goods. The cost of production will increase for virtually all the consumer goods that are produced from oil-running factories. Also, the means of transporting goods from city to city will be more expensive. All this will contribute in increasing the price of consumer goods. The economic size (or social welfare) would decrease also.

The overall increase in the price of oil and the price of consumer goods will lead to the decrease in the consumer spending overall. United States, especially California, is a place where the public transportation is not as advanced and popularly used as Korea. People usually drive their cars to go to work and go shopping. The increase in the price of oil will act as a disincentive for the people to go out on shopping. This will shift the demand curve from Demand 1 to Demand 2 decreasing the price of consumer goods from P2 to P1 and decreasing the quantity demanded from Q1 to Q2. Again, the economic size (or social welfare) will decrease. Some argue that the tax revenue form the taxes such as VAT will decrease countering the benefits by profits from implementing tradable permits.

In conclusion, the tradable permit will increase the profit of Californian government and at the same time cut down the level of pollution contributing to the global warming. However, the government should be fully aware of the complicated consequence or unintended effects of implementing any sort of policy distorting the market will have.

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Intro to Macroeconomics

Today in the class, we have learned simple diagrams about the economic transactions between firms and households. As you see in the diagram, the households provide factors of production (FoP) to the firms. Firms gives wages or rent for the factors of production provided by the households. The firm then provides the service or good by using these factors of production to the households. The households in reture gives payment to the firms for the service or the good.

We have learned about several economic terms such as GDP. GDP means Gross Domestic Product and it is the Total Value of all Spending in an Economy. It is the Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets.

Unlike GDP, GNP encounters for the total income earned by a nation’s factors of production regardless of where the assets are located. For example, lets say that there is one British businessperson doing business in Japan. His buisness is part of Japan’s GDP, but it is not part of Japan’s GNP. It is the part of UK’s GNP.

GDP per capita is GDP divided by population of that country. It is often used to show how much wealth each person has. However, there is one flaw with this index. If there is a huge disparity between the rich and the poor, like in United States, this value means less compared to when there is less disparity between rich and poor. According to Ms. Q in the class, only 1% of United State’s population owns 49% of financial wealth. So, GDP per capita is not always accurate.

GDP per capita is often used to evaluate one country’s standard of living, however, as it was stated, it is not always accurate. For example, there could be several trillionares and billions of poor in a country. As an alternative, many scholars use HDI to evalute standar of living of countries. It encounters for life expectancy, literacy rate, education, public health system, and etc. It looks at the different point of view compared to GDP per capita. According to the lecture today, Cuba has less thant 5000$ per capita, however, it has almost 100% literacy rate, which shows that it has high standard of living.

Extra Info: GDP can vary according to the country’s currency exchange rate to USD. As GDP is in US dollar, other foreign countries have to convert their currency to USD. For example, if the exchange rate goes down (value: Foreign currency<USD) the total GDP of the nation decreases. On contrary, if the exchange rate goes up, the total GDP of the nation increases dramatically. So this is one drawback to GDP.

There is an economic index called PPP that covers up the problem of GDP. “Purchasing power parity exchange rate is the exchange rate based on the purchasing power parity (PPP) of a currency relative to a selected standard (usually the United States dollar)” ( So it gets rid of the exchange rate drawback of GDP and gives more reliable data. However, there is one problem with this also. It is very difficult to measure the differences in quality of goods.

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Circular Flow Model

The Circular Flow Model

There are some assumptions in this Diagram:

  • No government regulations
  • No savings
  • All output is purchased

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Production Possibility Curve


  1. Resources are limited
  2. Shows how efficient an economy is
  3. Choices between alternatives -> trade offs
  4. Opportunity Cost increases
  5. Shifts outwards -> better technology & new resources

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