Chap20 Fundamental Economic Concepts

In order to accomplish

economic develop-

ment, the nations of the world

have to overcome the problems

that hinder their economic

growth and they must make use

of their resources effectively. To

learn more about the challenges

and opportunities of a global

economy, view the Chapter 27

video lesson:

Global Economic Challenges

Chapter Overview Visit the Economics: Principlesand Practices Web site at epp.glencoe.com andclick on Chapter 20—Chapter Overviews to pre-view chapter information.

Dish-shaped solar power reflectorsat a solar power station

http://epp.glencoe.com

The Global Demand for Resources

Key Terms subsistence, nonrenewable resources, embargo, gasohol, aquifer

ObjectivesAfter studying this section, you will be able to:1. Explain Malthus’s views on population growth.2. Explain the importance of conserving nonrenew-

able resources.3. List ways that people are using renewable energy

resources to conserve scarce resources.4. Identify other resources endangered by population

growth.

Applying Economic ConceptsScarcity Have you ever had a water shortage in yourarea? Read to find out how the price system works tosolve this problem.

Cover Story

Population Growth: A Global

ChallengeThe world’s popula-

tion continues to grow

at an accelerated pace.

It is estimated to hit 9.3

billion in 2050, an

increase of 50 percent

from 6.1 billion in 2001,

according to the latest

annual report from the

U.N. Fund for Population Activities. . . .

The world’s population has doubled in just four

decades, from 1960 to 2001. The current figure, to be

more exact is 6.134 billion . . . Half a century from

now, the world will be inhabited by 7.9 billion people,

even if fertility rates remain low. The figure will be

10.9 billion if the birth rate goes up. . . . Most of the

growth will occur in the developing countries. . . .

—The Japan Times, November 10, 2001

Earth’s population continues

to grow.

S carcity has been defined as the fundamentaleconomic problem. You experience scarcity atthe personal level, and scarcity is also a prob-

lem at the national level, even for relatively prosper-ous nations such as the United States. At the globallevel, scarcity reveals itself through food, energy, andother resource shortages—all of which are com-pounded as world population grows.

The world population has now surpassed 6 billion,and, as you read in the cover story, the next billionwill be here before long. In many respects, the earthis a very small planet, and it seems to be gettingsmaller every day.

The Global Population IssuePopulation growth has fascinated the worldever since Thomas Malthus published his

Essay on the Principles of Population in 1798. Hisviews, published over 200 years ago, are still relevant because of the earth’s growing populationand its demand for resources.

Main IdeaWorldwide economic challenges include overpopula-tion, food shortages, resource depletion, and envi-ronmental pollution.

Reading StrategyGraphic Organizer As you read the section, completea graphic organizer similar to the one below byexplaining the difference between renewable andnonrenewable energy resources and providing twoexamples of each.

Renewableresources

Nonrenewableresources

How do they differ?

Example

Example

Example

Example

CHAPTER 20: GLOBAL ECONOMIC CHALLENGES 545

545_GLENEPP 11/6/03 1:04 PM Page 545

Malthus: Views on Population Thomas Malthus argued that population would

grow faster than its ability to feed itself. The prob-lem, he stated, was that population tended to growgeometrically, as in the number sequence 1, 2, 4, 8,16, 32, 64, and so on. The ability of the earth tofeed people, however, would grow at a slower andmore constant rate, such as 1, 2, 3, 4, 5, and so on.Eventually, according to Malthus, the masses of theworld would be reduced to a condition of subsistence—the state in which a population pro-duces only enough to support itself.

In many countries—especially in the larger cities of the developing world—poverty is widespread. TheIndian city of Calcutta, for example, has about 14 million people. Calcutta is one of the poorest andmost crowded cities in the world. Hundreds of thou-sands of street dwellers beg and search for food in thecity dumps and refuse piles. At night they sleep inthe streets. Similar conditions exist in other parts ofthe world. In these places, the Malthusian predictionof a subsistence standard of living is a cruel reality.

Was Malthus Wrong? In many other parts of the world, conditions are

much better. Malthus did not foresee the enor-mous advances in productivity that have allowedan increasing standard of living to accompany agrowing population. He also did not foresee thatfamilies might choose to have fewer children. Insome countries, such as Japan, for example, thepopulation is actually shrinking.

Malthus’s predictions may not have beenentirely accurate for the industrialized countries,but they still have long-term consequences for allnations. Today, for example, population pressuresin other parts of the world are causing problems formany industrialized countries, including the UnitedStates, which is besieged by illegal immigrants fromChina, Mexico, and Haiti. As a result, many expertsargue that it is in everyone’s interest to controlglobal population growth.

World Population Trends Comparative world population growth rates are

shown in Figure 20.1. For the world as a whole, the

annual growth is approximately 1.4 percent a year.Although this may not seem very fast, the conse-quences can be enormous over time. Every year,the population increase is almost the equivalent ofadding another Mexico to the world. If the popu-lation keeps growing at this rate, it will reach about8 billion by 2020, and more than 12 billion by2050. At this rate, the population of the world willalmost double from the time you graduate fromhigh school until you retire at age 65.

Nonrenewable Energy ResourcesPopulation pressure adds to the depletion ofmany important resources, and energy is one

of these resources. Energy is necessary for produc-tion, and energy makes our lives more comfortable.In the form of gasoline, it powers cars. In the formof gas and electricity, it heats and cools homes.

Most of the energy we use comes from nonrenewable resources—resources that cannotbe replenished once they are used. The majornonrenewable resource category—fossil fuels—isbeing consumed at an alarming rate and may onlylast for a few more generations at current con-sumption levels.

Oil Oil is the biggest category of nonrenewable

energy in use today—primarily because it was soinexpensive during much of the 1900s. Oil was alsomuch more convenient to use than natural gas orcoal. Because it could be refined into low-costgasoline, automobiles were large, heavy, and usu-ally got poor gas mileage.

The low cost of oil even affected living habits.People moved to the suburbs and then spent hourstraveling to and from their jobs. Gasoline was soinexpensive that trains and city busses neverbecame as important as the automobile.

In 1973, however, the oil-producing countries ofthe Middle East placed an embargo—a restriction onthe export or import of a commodity in trade—on oilsales to the West. The embargo caused energy short-ages in many parts of the world, driving the price ofoil from $5 to more than $35 a barrel. Prices came

546 UNIT 5 INTERNATIONAL AND GLOBAL ECONOMICS

down slowly after that, reaching their inflation-adjusted pre-embargo levels in the mid-1990s. In late1998, the price of oil even dropped below $9 a bar-rel, although it has since rebounded.

With the exception of the 20 years following theoil embargo, the world was flooded with, and grewup on, cheap oil. The oil was eagerly consumed and,because it is a nonrenewable resource, is gone forever.

Natural Gas This category constitutes our second most impor-

tant energy source, accounting for nearly 25 percentof energy consumption in the United States.

Historically, natural gas was more difficult to trans-port and use than oil, and so it did not become animportant energy source until much later. Even-tually inexpensive natural gas became popular asan industrial fuel, and so many factories and indus-trial technologies were built around it.

Coal Coal is the third-largest nonrenewable resource

used in the United States. While it was the firstnonrenewable resource to be used on a large scale,oil and natural gas soon displaced it because theyare more convenient to use.


E C O N O M I C SA T A G L A N C EE C O N O M I C SA T A G L A N C E Figure 20.1Figure 20.1

Reading Maps The map shows the population growth rates of the countries of the world. How does the annual growth rate in China compare with that of Brazil?

Reading Maps The map shows the population growth rates of the countries of the world. How does the annual growth rate in China compare with that of Brazil?

Source: 2003 World Bank Development Indicators

2.5% and higher

2.0% - 2.4%

1.0% - 1.9%

0% - 0.9%

Less than 0%

no data

Average annual change

World Population Growth Rates

Visit epp.glencoe.com and click onTextbook Updates—Chapter 20 foran update of the data.

547_GLENEPP 11/6/03 1:06 PM Page 547


Today, nearly two-thirds of the world’s known coalreserves are in the United States, Russia, and China.Coal is the most plentiful fossil fuel in the world, buteven these supplies will eventually run out. Estimatesbased on the present rate of consumption indicatethat the reserves will last about 200 years.

Nuclear Energy Nuclear energy is the newest and fourth largest

source of nonrenewable energy, accounting fornearly 8 percent of all energy used in the UnitedStates. The future of nuclear power is uncertain,however, for a number of reasons.

One of the reasons is cost. Nuclear reactors areexpensive to build and maintain. Second, nuclearenergy produces highly hazardous byproducts, thesafe disposal of which poses a major problem.

Finally, there is always some chance that anuclear plant will fail, or that another accidentwould happen like the 1979 near-meltdown atThree Mile Island in Pennsylvania. The 1986 melt-down of the reactor in Chernobyl, Ukraine,served as another reminder of the nuclear powerhazards.

Renewable Energy ResourcesBefore 1973, the low price of oil gave every-one very little incentive to develop alterna-

tive energy sources. Renewable energy resourcesbecame more popular after the oil embargo, buttoday they still account for a small portion of thetotal energy we consume.

Hydroelectric Power Historically, hydropower was used to power the

mills and factories of the Northeast in the 1800s.The power was reliable, and its source—water—wasfree at the time. Later, a number of larger genera-tors at the Hoover Dam and the Tennessee ValleyAuthority were completed to generate power on amuch larger scale. Aside from these newer projects,most dams were small and could not distributepower very efficiently to other locations.

When oil was obtained cheaply from the MiddleEast, hydroelectric power became less important.By the late 1950s, many of the commercial powerdams in the United States had been abandoned.When oil became more expensive, however, some

Natural Resources

Energy Demand for scarce resources is one of the most pressing problems facing all nations. What arenonrenewable energy resources?


of the dams were put back into use. Today, hydro-electric power is our most important renewableenergy source, accounting for almost half of allrenewable energy consumed in the United States.

Biomass Energy made from biomass—wood and wood

waste, peat, municipal solid waste, straw, corn,tires, landfill gasses, fish oils, and other waste—isthe second most important category of renewableenergy sources. While relatively new, this categoryaccounts for approximately 40 percent of all renew-able energy consumed in the United States today.

Ethanol is grain alcohol made from corn.Ethanol is used to make gasohol—a fuel that is amixture of 90 percent unleaded gasoline and 10percent ethanol. Although gasohol has not beenaccepted as quickly as supporters first hoped, it stillhas a small share of the market in some areas.

Other, lesser-known alternatives are also beingused. Major food firms have made progress in con-verting chicken waste to fuel in the form of methanegas. This gas can then be recycled for industrial andcommercial use. Over 100 cities are currently recov-ering and using methane gas generated in municipallandfills when the landfill waste decomposes.

Solar Energy Solar power is the third largest source of renew-

able energy. Solar power has never been effec-tively harnessed, however, and it did not get muchattention at first. After the oil embargo, the fed-eral government began issuing grants toresearchers to find ways to reduce the cost of solarenergy. While solar power holds much promise, itonly accounts for a fraction of the renewableenergy used today.

Wind Power The fourth-largest category of renewable energy

sources is wind-generated electricity. In the early1980s many wind farms were built, each of whichproduced enough electricity to power a medium-sized city. California is the largest producer ofwind-generated energy, but it can also be found inTexas, Minnesota, Vermont, Hawaii, and Iowa.

While this is still a small category, wind-generatedelectricity is an important source of power in areassuch as islands or remote peninsulas where it is dif-ficult to obtain other forms of energy.

Other ResourcesResources other than those used to generateenergy—water and land in particular—may

also be in danger. In the past, American concernwith water focused mainly on the pollution of the


Reading Maps

E C O N O M I C SA T A G L A N C EE C O N O M I C SA T A G L A N C E Figure 20.2Figure 20.2

Reading Maps Nuclear reactors serve three general purposes. Civilian reactors generate energy for electricity and sometimes also steam for heating. Military reactors create materials that can be used in nuclear weapons. Research reactors are used to develop weapons or energy production technology. How many nuclear power plants are located in the former Soviet Union and Eastern Europe?

UKRAINE

BlackSea

BalticSea

BULGARIA

Kola

Novovoronezh

Sosnovy Bor

Smolensk

Ignalina

SLOVAKIA

Bohunice

Kozloduy

Chernobyl

RUSSIA

Graphite-moderatedreactors

Pressurized waterreactors

Kursk

LITHUANIA

The Most DangerousNuclear Reactors

country’s waterways. Today, however, the focus hasshifted to the availability of water and the realiza-tion that water is in critical supply in many parts ofthe country.

More than 80 percent of the water consumed inthe United States is used in agriculture, and mostof this water is used in surface irrigation, which hasa high evaporation rate. As a result, much water islost into the atmosphere.

Farmers have been able to tap large sources ofwater from rivers, streams, ponds, and aquifers—underground, water-bearing rock formations.

Aquifers supply nearly 40 percent of the water thatfarmers use and are also the source of fresh waterfor many communities.

One of the largest aquifers in the country is theOgallala Aquifer, which supplies water to theHigh Plains states from Texas to Nebraska. Somuch water has been pumped out, however, thatthe aquifer’s water table has been dropping aboutthree feet a year. Some experts even predict thatthe Ogallala Aquifer will run out of water in thenext 40 or 50 years.

The water shortage is also a problem in southernCalifornia. Over the years, plans have been pro-posed and projects have been undertaken to bringin water from areas hundreds of miles away.

Land is another valuable natural resource sub-ject to the demands of a growing world popula-tion. Land, however, is different from otherresources because there is only a fixed supply thatcannot be moved from one place to another.

A growing population has the effect of reducingthe amount of land available for agriculture. Ascommunities grow, factories, roads, and houses arebuilt on the fertile land near the rivers. The devel-opment of this land forces the farmers to move tothe outskirts. The phenomenon, now known asurban sprawl, has claimed some of our finest farm-land—covering fertile fields with expressways, shop-ping centers, and housing developments.

Checking for Understanding1. Main Idea How does population growth

affect world resources?

2. Key Terms Define subsistence, nonrenewableresources, embargo, gasohol, aquifer.

3. Describe how Malthus believed populationgrowth would affect the future of the planet.

4. Identify the importance of conserving non-renewable resources.

5. List the major renewable resources today.

6. Describe the effects that a growing popula-tion has on scarce resources such as aquifers.

Applying Economic Concepts7. Scarcity During the oil embargo, many peo-

ple openly advocated nonprice gasolinerationing. Some favored allowing each auto-mobile owner to use 10 gallons per week.What are the pros and cons of such a manda-tory rationing program?

8. Making Comparisons How do renewableresources differ from nonrenewableresources?

Practice and assess key social studies skills withthe Glencoe Skillbuilder Interactive Workbook,Level 2.

Science Biotechnology is making an impact in the worldeconomy. Genetic engineering allows re-searchers to place a gene into a plant in orderto create a new plant that can grow twice asfast. Agricultural experts estimate that withinthe next 40 years the world population willincrease by 50 percent, which means farmerswill need to produce more crops than everbefore. To sustain economic growth in thedeveloping world, experts believe that foodproductivity improvements must be made usingthis type of biotechnology.


A Classical Economist:

ThomasMalthus

(1766–1834)

Thomas Malthus was an Englisheconomist, sociologist, and mem-ber of the clergy who pioneeredmodern population study. He wasa kind, gentle person dedicated tohis father and his church. He wasalso the economist who is creditedwith giving economics the title of“the dismal science.”

EDUCATION

Malthus was born to wealthyparents and was educated at homeby his father and by private tutors.At age 18 he enrolled at JesusCollege, Cambridge, to studymathematics and the classics.

While he was away from home, Malthus and his fatheroften exchanged letters debatingthe popular issues of the day. At one point, the elder Malthusbecame fascinated with a popularutopian vision that promised even-tual peace, prosperity, and equalityfor all. Malthus attacked the argu-ment in a 50,000-word letter to hisfather. The elder Malthus was soimpressed that he encouragedThomas to publish the treatise

for others to read. The result wasAn Essay on the Principle of Populationas It Affects the Future Improvement ofSociety, published in 1798.

POPULATION THEORY

The book was an instant successthat was to change forever the waypeople viewed population. In it,Malthus argued that poverty anddistress would be the eventual fateof people, not the popular utopianvision. He reasoned that popula-tion would increase at a geometricrate (1, 2, 4, 8, 16, . . .), while foodsupplies would increase at an arith-metic rate (1, 2, 3, 4, 5, . . .).

According to this progression,population growth would eventuallyoutstrip the available food supply,resulting in famine, misery, and asubsistence standard of living forthe masses.

At first, Malthus thought onlythree factors could check thegrowth of population: war, famine,and disease. Several years later, as

he refined his ideas, he added afourth check: moral restraint.Separately or together, these fac-tors could raise the death rate,lower the birthrate, or both. InMalthus’s view, however, theserestraints on population growthwould not be enough to preventmost of the world from foreverremaining at the subsistence level.Despite his considerable accom-plishments in other aspects of economics, Malthus is bestremembered for his pessimisticviews on population.

Examining the Profile1. Evaluating Information Do you

agree or disagree with Malthus’s pre-dictions about population? Why orwhy not?

2. For Further Research Find out whatMalthus’s other contributions to eco-nomics were.


Economic Incentives and Resources

Main IdeaIncentives help preserve scarce resources.

Reading StrategyGraphic Organizer As you read the section, completea graphic organizer similar to the one below byproviding examples of ways to curtail the incentiveto pollute.

Methods to curtailthe incentive to

pollute

Example Example

Key Terms glut, pollution, acid rain, pollution permit

ObjectivesAfter studying this section, you will be able to:1. Explain how the price system helps conserve water,

natural gas, and oil.2. Describe government efforts to limit pollution.3. State the importance of using resources wisely.

Applying Economic ConceptsMarkets and Prices Have you ever traveled to differ-ent gasoline stations to get the cheapest price for agallon of gas? Read to find out how markets andprices operate in the free enterprise system.

E conomic systems require incentives to makethem work smoothly. In a market economy,incentives such as the profit motive and prices

can be used to preserve scarce resources.Economic incentives are important because they

tend to encourage more widespread and lastingresults than other programs that rely on conscience,patriotism, or other motivations. Those who createthem, as you read in the cover story, often abandonvoluntary conservation programs.

The Price SystemWith resources becoming increasinglyscarce, it is important to see how the price

system contributes to the conservation—or lack—of scarce resources. The examples that followillustrate this influence.

The higher price for oil after 1973 dramati-cally affected the production of oil. When oilwas priced below $5 a barrel, few countries were

Cover Story

Lawmakers Can Recyclingin House

WASHINGTON

(AP)—The House of

Representatives has

rejected mandatory

recycling for its offices.

The House has

had a voluntary recy-

cling program for a

decade. But the Associated Press reported last month

that most congressional offices were still mixing alu-

minum cans, bottles and different grades of paper.

Many federal agencies and local governments sepa-

rate their trash and sell recyclable material.

—The Washington Post, June 11, 1999

Recycling area

552

willing to devote large resources to retrieve it.When the price increased to $35 and more, manycountries increased their production almostovernight. At the same time, interest in alternativeenergy sources soared, and countries poured bil-lions into energy-research projects ranging fromshale oil to solar power.

By 1981, however, prices began to fall because ofa worldwide glut—a substantial oversupply—of oil.A decline in demand caused by a recession con-tributed to the worldwide oversupply. People hadalso learned to conserve energy, which furtherreduced the demand for oil.

The collective impact of the increase in worldsupply and the decline in demand caused OPEC tolose some of its ability to control the supply of oil.This control slipped even further after the PersianGulf War, when some OPEC members increasedoil production to replenish their financial reservesdepleted during the war. Finally, oil prices reachedtheir pre-embargo levels in the mid-1990s.

Lower oil prices had several consequences. First,the search for alternative energy sources began towane. Second, the exploration for new oil sloweddramatically because companies already hadenough oil. Third, consumers changed their spend-ing habits again. New houses became large oncemore, and consumers opted for low-mileage, sportutility vehicles instead of fuel-efficient economycars.

In the end, the very mechanism that encouragedpeople to conserve energy when oil prices werehigh—the price system—did exactly the oppositewhen oil prices went down again.

When farmers pump water out of the ground towater their crops, they use pumps driven by elec-tricity or natural gas. When water tables fallbecause of pumping, it costs more to pump thewater. The increased cost of pumping encourageseveryone to use it more efficiently, thus conservinga scarce resource.

In time, the falling water table makes some ofthe shallow wells useless, requiring deeper andmore costly wells to be drilled. At this point, theprice system will affect farming decisions again.Deeper wells will be dug for the most profitablecrops, while marginal and unprofitable crops willbe abandoned.

Ultimately, the price system works to establishan equilibrium between the rising cost of obtainingwater and the profitability of the crops grown withthe water. Although some crops and fields will beabandoned, they are likely to be the ones that werethe least productive in the first place. As a result,the actual amount of lost agricultural output willnot be that large.

When the price of natural gas was low in the1960s, the quantity demanded was high. Becausegovernment regulated the price, however, produc-ers had little incentive to increase its production.

Congress then tried to stimulate gas discoveryand production by lifting the price controls ondeep gas-pockets of natural gas, 15,000 feet or morebelow the earth’s surface. The price of this gas thenrose to three or four times its previous level, caus-ing even more exploration for deep gas. Later, allgas price controls were removed, which encouragedeven more production.

Conservation

The Price System Surface irrigation systemsare fairly common in the United States. Howdoes the price system affect farming decisions?


The lack of interest in drilling for shallow gaswas consistent with the law of supply, which main-tains that the lower the price paid to producers, theless will be brought to market. Also consistent withthe law of supply was the effort by producers toproduce more of the deregulated deep gas when itsprice went up.

Pollution and Economic IncentivesPollution is the contamination of air, water,or soil by the discharge of poisonous or nox-

ious substances. Pollution is a problem that mostcountries face today.

The Incentive to Pollute Pollution does not occur on its own: it occurs

because people and firms have an incentive to pol-lute. If that incentive can be removed, pollutionwill be less of a problem.

For years, factories have located along the banksof rivers so they could dump their refuse into themoving waters. Some factories that generatedsmoke and other air pollutants located farther fromthe water, but their tall smokestacks still blew thepollutants long distances. Others tried to avoid theproblem by digging refuse pits on their propertyand burying their toxic wastes.

In all three situations, factory owners were tryingto lower production costs by using the environ-ment as a giant waste-disposal system. From an eco-nomic point of view, the reasoning was sound.Firms get ahead when they lower production costs.Those who produce the most at the least cost makethe most profits.

The cost of pollution to society as a whole, how-ever, is huge. For example, acid rain—a mixture ofwater and sulfur dioxide that makes a mild form ofsulfuric acid—falls over much of North America,damaging countless rivers and streams. Fertilizerbuildup and raw sewage runoff poison eco-systems in other areas. The damage caused by pol-lution is extensive, but it can be controlled. Oneway to control pollution is through legislated stan-dards. Another way is through economic incentives.

Controlling Pollution Legislated standards include laws that specify the

minimum standards of purity for air, water, andauto emissions. Congress, for example, hasdeclared that all automobiles sold in the UnitedStates must meet certain pollution standards.

Legislated standards can be effective, but theyare generally inflexible. Once a standard is set, afirm has to meet it or cease production. Because ofthis, many firms lobby extensively to exempt theirindustry from the pollution controls.

Another method of controlling pollution is tohave companies pay taxes on the amount of pollu-tants they release. The size of the tax would dependon the severity of the pollution and the quantity oftoxic substances being released.

The Environmental Pro-tection Agency (EPA) isthe federal agency respon-sible for protecting theenvironment. It employsthousands of inspectors tosupervise enforcement ofpollution control laws andregulations.

The WorkEPA inspectors examine air, water, and soil for evidence ofpollution. Investigating the cause and scope of pollutionrequires inspectors to visit sites where pollution mightoccur, test for pollutants, and collect samples for analysis.They monitor the air quality of major cities and of indus-trial sites. After completing their examination, EPAinspectors put together reports of their findings and initi-ate action to stop further pollution.

QualificationsEPA inspectors generally have a college education with aspecialization in environmental or biological science, plusseveral years of experience in the field. As with most gov-ernment jobs, EPA applicants must pass a civil serviceexamination.

EPA Inspector

554

Suppose a community wants to reduce air pol-lution caused by four factories, each of whichreleases large quantities of coal dust. A $50 tax onevery ton of coal dust released into the air wouldbe applied to each factory. Devices attached to thetop of the factory’s smokestacks would measure theamount of dust released during a given period, andthe factory would be billed accordingly.

Each company would then have the choice ofpaying the tax or removing the pollutants them-selves. This tax approach does not try to remove allpollution. It does, however, allow individual com-panies freedom of choice. It also provides flexibil-ity that legislated standards lack—and may evenprevent some plants from closing entirely.

Some firms would rather pay the tax than cleanup their own pollution. These firms, however, helpfund the pollution clean-up campaign. Consumerswill not have to fund these efforts out of theirincome, sales, or property taxes.

Pollution Permits The Environmental Protection Agency (EPA)

currently uses a similar system to reduce sulfurdioxide emissions at coal-burning electric utilities.Sulfur dioxide emissions from the burning of coaland oil react with water and oxygen to form com-pounds that fall to the earth as acid rain. TheEPA’s target is to ultimately reduce sulfur dioxideemissions to a level of nine million tons per year.

Student Web Activity Visit the Economics: Principlesand Practices Web site at epp.glencoe.com and clickon Chapter 20—Student Web Activities for an activ-ity on the Environmental Protection Agency.

Fighting Pollution

The Incentive to Pollute Pollution is one of the painful by-products of modern life. Damage caused bypollution is extensive. What methods are used to hinder the incentive to pollute?



Issuing PermitsThe EPA started its program by issuing sulfur

dioxide pollution permits—federal permits allow-ing public utilities to release pollutants into theair—in 1993. Utilities are not allowed to operatewithout them, but if a utility has more permitsthan it needs, it can sell them in one-ton incre-ments. Thus, utilities that want to spend money onemissions cleanup could sell their permits, and usethe cash to clean up their emissions. Those whoprefer to purchase and use the permits can do so.

The first set of pollution permits went on salein March 1993 at the Chicago Board of Trade. Theone-ton permits brought prices ranging from $122to $450 each. The EPA issued additional permitsin successive years, but fewer permits will beissued as time goes on, making them scarcer andmore expensive. Ultimately, the utilities willeither have to pay very high prices for the permits,or they will have to buy additional antipollutiondevices.

AdvantagesThe system also has advantages for environmen-

talists who wanted utilities to reduce pollution ateven faster rates. Several environmental groupspurchased the pollution permits with their ownfunds, making them scarcer and therefore moreexpensive, for the utilities.

Using Resources WiselyThe resource challenge is vital to a growingglobal economy. Resources become scarce

when the quantity demanded for them is greaterthan the quantity supplied. In a market economy,the price system plays a major role in the alloca-tion of resources. It tells consumers whenresources are scarce. It also helps decision makersallocate resources more wisely.

Economists who understand the workings of amarket economy are optimistic about the future,especially if the price system is allowed to functionand fulfill its role in the economy. As long as theprice “system” is allowed to operate, we will neversuddenly run out of an endangered resource.

Checking for Understanding1. Main Idea What are two incentives that can

be used to preserve scarce resources in amarket economy?

2. Key Terms Define glut, pollution, acid rain,pollution permit.

3. Describe how the price system helps conservewater, natural gas, and oil.

4. Identify the ways that the government triesto limit pollution.

5. Explain why resources should be used wisely.

Applying Economic Concepts6. Markets and Prices Suppose that the demand

for natural gas increases sharply because of aseries of extremely harsh winters. How woulda price increase affect gas usage as well asresearch efforts by natural gas companies?

7. Making Comparisons How do legislatedstandards and economic incentives differ inregard to pollution control?


Global Warming Most climatologists agree that theearth is likely to warm by as much as 2° to 9° F overthe next 50 to 60 years. Human activities havereleased gasses that trap in the sun’s rays and heatthe earth. Scientists believe that polar caps willbegin to melt, raising sea levels from at least a footto as much as 6.6 feet in the next century. An esti-mated one-third of the world’s population who livewithin 40 miles of the sea could be facing severeflooding and depletion of their freshwater sources.


Foreign plants and animals are invadingNorth America as a result of increasedglobal trade and tourism, costing the U.S.billions of dollars each year. No longerhindered by time and distance, diseasecan strike any species, anywhere.

BioinvasionWhen reptile dealer Wayne Hill brought an

ailing leopard tortoise into the veterinary clinicat the University of Florida at Gainsville in 1997,he was in for a big surprise. His pet, it turnedout, had stowaways. Discreetly hidden beneaththe animal’s “armpits” were thumbnail-sizeAfrican ticks, Amblyomma marmoreum. Thesecritters can harbor a bacterium that causes heart-water, an animal disease that is endemic in sub-Saharan Africa but has spread to the Caribbean.

In the U.S., where cattle, sheep, deer, and elkhave no immunity to the disease, heartwatercould wipe out whole herds. . . .The tick thatspreads heartwater is just the latest in a long listof foreign diseases that threaten ranch and farmeconomies throughout the world. . . .

Scientists andenvironmental i s t shave dubbed thisphenomenon “bioinvasion.” And the tell-tale signs of it arefound all over theworld. . . .In Mexico,just 200 miles from the Texas border, nearly 14million chickens were slaughtered this springbecause of a highly contagious virus calledExotic Newcastle Disease. A virus called Nipahhas destroyed the Malaysian pork industry andkilled 105 people. In North America, veterinari-ans are fighting a deadly parasitic disease calledleishmaniasis. . . .

Experts blame the spread of these and otherpests on an explosion in world trade, businesstravel, and tourism. Global trade policies aggra-vate the problem by putting strict limits oncountries' abilities to ban animal trade.Meanwhile, in the U.S., years of flat budgets forborder inspectors and disease researchers haveleft populations of animals—and humans—dou-bly exposed.

Such oversights can incur appalling costs.Even in the U.S., which has been spared theworst of the recent plagues, the price tag for bat-tling agricultural blights ran to $9 billion lastyear, according to a Cornell University study. . . .—Reprinted from September 11, 2000 issue of Business Week, by special

permission, copyright © 2000 by The McGraw-Hill Companies, Inc.

Examining the Newsclip1. Understanding Cause and Effect How have

trade policies contributed to bioinvasion?

2. Analyzing Information What role have U.S.budget decisions played in this bioinvasion?

N e w s c l i p

The cattle industry could be affected by a bioinvasion.


557_GLENEPP 11/6/03 1:14 PM Page 557

Applying the Economic Way of Thinking

Key Termscost-benefit analysis, modified free enterprise economy

ObjectivesAfter studying this section, you will be able to:1. Describe the reasoned approach to economic deci-

sion making.2. Understand how our market economy will be able

to cope with the future.

Applying Economic ConceptsCost-Benefit Analysis Have you ever decided not todo something because the cost of doing it wasgreater than the benefits that would be received?Economists call this cost-benefit analysis—and theyuse this analysis often. If you think the same way, per-haps you are starting to think like an economist.

A s a science, economics is concerned with theway in which people cope with scarcity.Because scarcity is a universal problem, the

study of economics is important to everyone.The economic system based on capitalism and free

enterprise has, as you just read in the cover story,done quite well. There is also every likelihood that itwill continue to do well in the future—although wealso expect some evolution and modifications as wedeal with new challenges and opportunities.

A Framework for Decision MakingThrough the study of economics, you learnthat choices must be made. You begin to

discover different ways to analyze a problem, andthat alternatives must be considered. The lateeconomist Kenneth Boulding observed that eco-nomics has evolved to the point that it has nowbecome a generalized theory of choice.

Cover Story

The Outlook—Pushing Adam

Smith Past the Millennium

WASHINGTON—If

Adam Smith were to visit

the U.S. at the millennium’s

end, he would like what he

saw. . . . Today, the invisible

hand is more limber and

supple than ever.In the past two decades,

globalization has forced

American companies to compete on a worldwide scale,

and the collapse of communism has extended capitalis-

tic principles to every corner of the globe. Deregulation

has injected market forces into areas long insulated

from them . . . [and] the Internet has helped better-

informed buyers find legions of new sellers, and sellers

find far-flung buyers. . . .

—The Wall Street Journal, June 6, 1999

Free market idea grows

Main IdeaEconomics provides a foundation for analyzingchoices and making decisions.

Reading StrategyGraphic Organizer As you read the section, completea graphic organizer similar to the one below bydescribing how American capitalism has changed.

Capitalismof the 1930s

American capitalism

Capitalismtoday

558

Economics provides a framework for decisionmaking that helps people to become better decisionmakers. The future will be different than the past, oreven the present for that matter, but some things ineconomics—the way we think about problems—arelikely to remain the same.

A Reasoned ApproachEconomic decision making requires a careful,

reasoned approach to problem solving. TheNational Council on Economic Education, anorganization dedicated to the improvement of eco-nomic literacy in the United States, recommendsfive steps. These steps provide useful guidelines todecision making.

1. State the problem or issue.2. Determine the personal or broad social goals

to be attained.3. Consider the principal alternative means of

achieving the goals.4. Select the economic concepts needed to

understand the problem and use them toappraise the merits of each alternative.

5. Decide which alternative best leads to theattainment of the most goals or the mostimportant goals.

—A Framework for Teaching the Basic Concepts, 1996

Life is full of trade-offs, but you will be betterequipped to deal with the future if you know howto analyze the problems you will encounter.

THE INFORMATIONREVOLUTIONIn this era, not only is capitalism global but so isthe Information Revolution. As powerful datanetworks spread, the developing nations arebeing drawn into the borderless informationeconomy.

Inside a gleaming computer center in Taipei, ayoung engineer labors late into the night.Connected by the Internet to some of the best soft-ware writers in the U.S., he is helping design a digi-tal phone system that will match anything the U.S.or Europe can muster.

In China’s northern boomtown of Tianjin, anauto worker pores over documents on how toarrange a low-interest mortgage on a modern con-dominium. In Mexico City, a working couple plowssavings into a mutual fund, all to put two childrenthrough private school.

Ingenuity, new prosperity, middle-class striving—familiar Western values are appearing on the fron-tiers of capitalism. Multiply these scenes by themillions, and you see the shape of a revolution that

will transform the global economy well into thenext century. Already, capitalism is flourishing inregions as diverse as communist Asia and the formerdictatorships of Latin America. Affluence is liftingmillions out of poverty, giving many the chance topurchase their first Fiats and Toyotas as well as theirfirst Apple computers and Panasonic VCRs. Andinflation is brought to heel in even the most way-ward economies.

The implications are huge for rich and pooralike. Hundreds of millions of peasants are leavingancient ways of life for the factory. Cities such asGuangzhou and Bangalore teem with new inhabi-tants. Many are living poorly, of course, but just asmany are thriving.

—Business Week, December 14, 1998

1. Summarizing Information What is themain point of the article? Write a thesissentence in your own words explaining themain point.

2. Drawing Conclusions “The InformationRevolution will draw economies from dif-ferent parts of the world closer.” Do youagree or disagree with this statement?Explain your answer.

Critical Thinking


Decision Making at the Margin Economists use a number of tools to help them

analyze and make decisions. Some of these toolsinclude production possibilities curves, supply anddemand curves, production functions, and eventhe National Income and Product Accounts.

One of the most important decision-makingtools is the concept of marginal analysis. For exam-ple, when a firm makes a decision to produce addi-tional output, it compares the extra cost ofproduction with the extra benefits to be gained. Ifthe benefits outweigh the costs, the firm decides tocontinue with the additional production. If thecosts outweigh the benefits, the firm decides not toproduce the additional output.

This process—cost-benefit analysis—involves com-paring the costs of an action to its benefits. Firmsuse cost-benefit analysis when they make decisionsto produce or purchase additional capital equip-ment. Many government agencies use it when theyevaluate programs. Individuals also use it when theymake decisions. Cost-benefit analysis is even usedto make choices among economic goals. Somechoices will work against one goal while favoring

another, but evaluating the costs and benefits ofeach choice helps in making decisions.

Finally, we must remember that the economistuses a very broad definition of costs—that of oppor-tunity costs. This ensures that we account for all ofthe costs of a decision, not just the monetary ones.

Coping With the FutureEveryone wants to know what will happen tothe economy in the future. How will it adjust

and what course will it take? Part of the answer canbe found by examining the way markets work.

Markets and Prices Our modified free enterprise economy—a free

enterprise economy with some governmentinvolvement—is one that allows buyers and sellersto freely make the decisions that satisfy their wantsand needs. The forces of supply and demand inter-act to establish prices in a market. Prices, in turn,act as signals, helping producers and consumers tomake or even alter their spending decisions.

Prices also influence the allocation of resourcesacross markets. The high price of oil in the 1970smade other energy sources competitive. In the 1980s,the high prices of personal computers attracted pro-ducers. Competition soon lowered prices and madethe same computers affordable to mass markets.

A market economy has many advantages,including the ability to adjust to change gradually,without the need for government intervention. Aslong as the forces of supply and demand areallowed to function, they will send producers andconsumers the signals needed to reallocateresources. Although no one knows what the futurewill bring, capitalism has demonstrated its abilityto adapt in the past, and it is likely to do so againin the future.

The Triumph of Capitalism During the 1930s, the forces of socialism and

communism were sweeping the world, while capi-talist countries were in economic depression.Communism in the Soviet Union had considerable

INFOBYTEINFOBYTE

Economic Forecasts An economic forecast is aprojection regarding the future direction of all or part of the economy. Economists analyze economic data to identify trends, and perform statistical evaluations to build their forecasts.Economists are like scientists in that they studyphenomena by making observations based on col-lected data. The purpose of their studies is touncover relationships between economic eventsand variables. An economist may, for example,study trends in the price and sales behavior of thedomestic automobile market to arrive at a predic-tion of future auto sales. Businesses and govern-ments rely on such forecasts for policy-makingand goal-setting purposes. Individuals rely onthese forecasts for their spending and investingdecisions.


impact upon the world, and socialist parties wereon the rise in the European colonies in Africa.

Since then, communism in the former SovietUnion has collapsed under the weight of its owninefficiencies. Many socialist countries haveembraced capitalism and the discipline of the mar-ket system. In addition, many developing countrieshave chosen capitalism as their economic system.Many emerging economic powers—includingSingapore, South Korea, and Taiwan—owe much oftheir remarkable growth to capitalism.

Capitalism is now the dominant economic forcein the world, but it is not the laissez-faire capitalismof the past. Capitalism has changed because peoplehave addressed some of the weaknesses that KarlMarx and others identified many years ago.

The capitalism of the 1930s was ruthlessly effi-cient in that it provided only for those who pro-duced or earned enough to buy the necessities oflife. Early capitalism had little room for the elderly,the ill, or the incapacitated. Many economiestoday, including that of the United States, have amodified free enterprise economy, or modified pri-vate enterprise system. This is a free-market econ-omy based on capitalism, yet modified by itspeople to satisfy the economic goals of freedom,efficiency, equity, security, full employment, pricestability, and economic growth.

Capitalism has evolved over the years, and itshows every sign of continuing to do so in thefuture. In this respect, capitalism adjusts to change

the same way a market adjusts to small changes insupply and demand—incrementally, with adjust-ments so small that they are hardly noticed in theshort run. This ability to evolve, and to adjust tothe demands placed on it, are strengths of capital-ism that will continue to ensure its success.

Checking for Understanding1. Main Idea How does cost-benefit analysis

affect the decision-making process?

2. Key Terms Define cost-benefit analysis, modified free enterprise economy.

3. Explain the reasoned approach to economicdecision making.

4. Describe how a market economy adapts tochange.

5. Explain how marginal analysis assists in decision making.

Applying Economic Concepts6. Cost-Benefit Analysis Think of a decision you

must make in the next few days. How willyou use your estimates of the costs and bene-fits to make your decision?

7. Synthesizing Information Provide an exam-ple of how prices act as a signal to you as abuyer and as a seller.


Nature of Capitalism

Adaptability In many industrial countries, cap-italism is the prevailing economic system.Capitalism is based on private ownership of themeans of production and on individual economicfreedom. How was the capitalism of the pastdifferent from the capitalism of today?


Making PredictionsPredicting future events is obviously difficult and sometimes risky. The moreinformation you have, however, the more accurate your predictions will be.

In 1950, only 42 percent of Latin Americans were citydwellers; today almost 73 percent live in cities, according tothe United Nations. This compares with 34 percent inAfrica and 33 percent in Asia. Despite oppressive poverty,Peruvians seeking a better life, for example, have beenfleeing the countryside for Lima at the rate of more than athousand a day and building settlements that seem like anever-ending expanse of small straw huts next to a noisyhighway. The trend has created megacities throughout thecontinent.

The equation is similar in many countries. The majorcity attracts one-quarter to one-third of the country’spopulation, with many living in squalid slums . . .encircling the affluent city. Experts say that by the year2010, Rio de Janeiro and Sao Paulo will be onecontinuous megalopolis 350 miles long with almost 40million people.

—by John L. Petersen, The Road to 2015

1. What trend does the passage show?

2. Do you think the trend the writer describes is likely tocontinue?

3. On what do you base this prediction?

4. What occurrences might have an effect on changingthe trend?

5. What are three possible consequences or outcomes ofthis trend?

Learning the SkillFollow these steps to help you analyze information

in order to make predictions.

• Gather information about the decision or action.

• Use your knowledge of history and human behav-ior to identify what consequences could result.

• Analyze each of the consequences by asking: Howlikely is it that this will occur?

Practicing the SkillStudy the following passage, then answer the

questions that follow.

Analyze three articles in the business section of the newspaper. Predict three consequences of theactions in each of the articles. On what do youbase your predictions?

Practice and assess key social studies skills with theGlencoe Skillbuilder Interactive Workbook, Level 2.

Market scene, Peru

562

S e c t i o n 1

The Global Demand for Resources (pages 545–550)

• Over 200 years ago, Thomas Malthus predictedmany of the population problems some developingnations face today—high birthrates, famine, and thethreat of a subsistence standard of living.

• Malthus did not foresee advances in technology orthat some birthrates would fall and some popula-tions cease to grow.

• Many nonrenewable resources such as oil, naturalgas, and coal are threatened today.

• The oil embargo of the early 1970s raised oil pricesand encouraged Americans to seek alternative energysources, along with alternative and renewableenergy sources.

• Some renewable energy resources—hydroelectricpower, biomass, solarpower, wind power—havebeen developed, includ-ing gasohol, a combina-tion of unleaded gasolineand grain alcohol.

• Other resources like waterand land are also comingunder pressure because ofpopulation growth.

S e c t i o n 2

Economic Incentives andResources (pages 552–556)

• During the oil embargo of the 1970s, high gas pricesprovided an incentive to preserve resources. Whenprices came back down, conservation efforts waned.

• As the population has grown and used more energyresources, people have become concerned about pollution.

• The traditional response topollution is to have thegovernment pass legislatedstandards prohibiting it.

• Economists argue thatpollution cannot be con-trolled until the eco-nomic incentives to pollute are removed.

• Programs including pollution taxes and pollutionpermits are designed to give firms the incentive tonot pollute.

• Markets have the flexibility to adjust to change—anadjustment that affects prices and the allocation ofresources.

S e c t i o n 3

Applying the Economic Way of Thinking (pages 558–561)

• Economics has become a generalized theory ofchoice and a framework for decision making.

• The National Council on Economic Education hasrecommended a five-point approach to decisionmaking; the final step involves cost-benefit analysis,which compares the cost of a decision to the benefitsgained.

• A fundamental knowledge of economics helps peo-ple cope with the future, especially now that capital-ism has emerged as the dominant type of economicorganization in the world today.

• Modern capitalism is not the ruthlessly efficientversion of the 1930s; modern capitalism has beenmodified to suit the economic goals of their people.

• In the markets of the world today, supply anddemand establish prices, and prices serve as signalsto both producers and consumers.

• The flexibility markets provide enables the modernmodified free enterprise economy to better dealwith the unforeseen events of the future.


Identifying Key TermsWrite the term that best completes the following sentences.

a. pollution permits f. pollutionb. biomass g. aquiferc. modified free h. embargo

enterprise economy i. gasohold. glut j. subsistencee. acid rain

1. The state in which the population produces barelyenough to support itself is _____ .

2. The United States has a(n) _____ , a system that hasbeen altered by its people to satisfy economic goals.

3. A restriction on the export or import of a commod-ity in trade is a(n) _____ .

4. _____ is a mixture of 90 percent unleaded gasolineand 10 percent grain alcohol.

5. An underground water-bearing rock formation isa(n) _____ .

6. The second largest source of renewable energy is_____ .

Reviewing the FactsSection 1 (pages 545–550)

1. Describe why, despite Malthus’s predictions, certainparts of the world have enjoyed steadily increasingstandards of living.

2. Explain where the most rapid rates of populationgrowth are found.

3. List the four major nonrenewable energy resources.

4. Describe the major drawback of nuclear energy.

Section 2 (pages 552–556)

5. Explain how American consumers and the auto-mobile industry reacted to the oil price increasesof the 1970s.

6. Explain how the reluctance of oil and gas produc-ers to drill for shallow gas was consistent with thelaw of supply.

7. Describe what the EPA hopes to accomplish byissuing pollution permits.

8. State how the price system in a market economyhelps ensure that resources are used wisely.

Section 3 (pages 558—561)

9. List the steps involved in economic decision making.

10. State the importance of cost-benefit analysis.

11. Explain why adapting to change is important foran economic system.

Thinking Critically1. Making Comparisons If you had to decide to

use legislated standards or a pollution tax toreduce pollution, which would you choose? Inyour reasoning, explain the pros and cons of eachapproach. Use a graphic organizer similar to theone below to organize your answer.

Self-Check Quiz Visit the Economics: Principlesand Practices Web site at epp.glencoe.com andclick on Chapter 20—Self-Check Quizzes to pre-pare for the chapter test.

Pros Cons Pros Cons

Controlling Pollution

Legislatedstandards

Pollution tax



2. Making Predictions In what ways can Americansensure the wise use of resources? How might theworld be different in 50 years if we do not useresources wisely today?

Applying Economic Concepts1. Scarcity Scarce natural resources are a problem

that concerns citizens throughout the world. Whatcan you personally do to help conserve resources?

2. Modified Free Enterprise Economy The UnitedStates has a modified free enterprise economy inwhich the government regulates some industries.Do you think the government should play asmaller or larger role in regulating the Americaneconomy? Give reasons to support your answer.

Math PracticeMany people all over the world recycle their alu-minum cans in order to help our environment. Thegraph below shows the percentage of aluminum cansthat have been recycled over the years. Study theinformation presented in the graph, then answer thequestions.

1. During which year was the largest percentage ofaluminum cans recycled?

2. In 1974, 2.3 billion cans were recycled. Write a for-mula to show the total number of cans consumedduring that year.

Thinking Like an EconomistRenewable energy resources only account for a smallportion of our total energy production. Explain thechanges that would have to take place in order for peo-ple to make greater use of renewable energy resources.

Technology SkillUsing a Database Create a database on recycling cen-ters in your community. Look in the telephone bookto locate the nearest recycling centers. Find out thename, address, phone number, and operation hours ofeach service, and what services each provides. Use thisinformation to create a database, making separatefields for the materials, the locations, and the rebatespaid for recycled items. Print and distribute your data-base to the rest of the class.


Making Predictions The table below depictsthe median inflation rate for advancedeconomies, developing countries, and coun-tries in transition for selected years. Study thetable, then answer the questions that follow.

1. Which economies do you predict to main-tain a relatively low rate of inflation? Whydo you think this is the case?

2. If trends continue, do you project themedian inflation rate for developing coun-tries to rise, decrease, or stay at about thesame level? Why?

1974 1978 1982 1986 1990 1994 1998

Source: The Aluminum Association, Inc.

Recycling

11/20

1/41/6

1/216/25 13/20 21/33

1997 1998 1999 1980–89 1990–99

14.8 11.0 7.7 1.2 165.6

5.6 4.8 4.1 9.9 8.4

Countries inTransitionDevelopingCountriesAdvancedEconomies 1.7 2.1 2.1 6.9 2.8

Source: World Economic Outlook


Chap20 Fundamental Economic Concepts

Education

Transcript of Chap20 Fundamental Economic Concepts