McGill Journal of Economics: 2022 edition

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ACKNOWLEDGEMENTS We are grateful to the Arts Undergraduate Association for its generous financial support and the Department of Economics for its continued support of the Economics Students Association

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ESA

© Cover design by Nadira Anzum. All rights reserved.

The opinions expressed in this journal do not necessarily represent the views of the editors, the Arts Undergraduate Association, the Economics Students Association, or McGill University.

The essays herein are copyright of the McGill Journal of Economics. All rights reserved.

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Foreword The editors recently approached me to write a brief Foreword for the 2022 issue of the McGill Journal of Economics (MJE). I am honoured and happy to oblige.

I have been a skeptic of orthodox (or mainstream) economics since I was a student, all through my ongoing career with the Ministry of Finance, and, since 2018, with McGill. I have sometimes been dismayed at the slow pace of change in thinking within conventional economics. There is an ever-growing gap between the realities of our world and the abilities of DSGE and other models, along with their notions of the representative agent and general equilibrium, to explain our world, distill implications for policymakers, and make fundamental predictions. In my experience, that this gap widened in the decade prior to the financial crisis and its aftermath is fact and not opinion.

Having said this, my experience since I began teaching at McGill—and in reading through the papers prepared for the 2022 issue of the MJE in particular—generally gives me cause for hope that the pace of change in the discipline is accelerating. The overwhelming majority of economics students with whom I have interacted at McGill over the past five years is gravely concerned about the converging existential challenges facing modern globalized civilization.

They want to do something with their McGill educations and subsequent careers to help steer the world in a more sustainable direction, and are thinking in a more interdisciplinary manner.

The ten papers included in this year’s MJE bear this out. They range from high-level macroeconomic policy issues (helicopter money and debt-deflation dynamics) to addressing climate change and other ecological decline (car-free city-centers, carbon taxes, excise taxes on beef) to development (FDI and urbanization in China) to the ongoing COVID-19 pandemic (externalities of vaccines). They also engage with social policy issues (universal dental care), the functioning of markets (Efficient Markets Hypothesis), and, in my view—with respect to the history of thought paper (J.S. Mill on the economic merits of colonization)—whether we can examine issues such as high and rising inequality on purely economic grounds. All the papers address issues relevant to our time, and many of them have interdisciplinary aspects. All of them link theory to policy or the history of thought to contemporary debates, directly or indirectly.

As a final point, this latest volume of the MJE is testimony to the fact that the discipline is evolving for the better at the so-called grassroots level, and that McGill’s Department of Economics and its students are playing their part in this evolution. I wish you happy readings—the essays contained herein are definitely worth your time.

Julian Karaguesian Visiting Lecturer, Department of Economics McGill University

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Table of Contents Foreword Written by Professor Julian Karaguesian Pp. ii

Letter from the Editor-in-Chief Written by Adam Chatelan Pp. v

The Editorial Team Pp. vi

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Examining the Positive External Benefits Associated with COVID-19 Vaccines from the Perspective of Public Policy Makers by Utilizing the SIRD Epidemiological Model Written by Azwar Ali, Abdullah Khan, and Sohaib Zaheer Edited by Tahsin Kabir Etul, Kaifuzzaman Khan, and Ava Liang Pp. 1-14

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Using Helicopter Money in the Context of the Eurozone’s Response to the Covid-19 Economic Crisis Written by Ludovic Tillette de Clermont-Tonnerre Edited by Ava Liang, Nada Abdelhamid, and Kaifuzzaman Khan Pp. 15-24

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Implementing a Car-Free City Centre and Developing New Bike Lanes in Montreal Written By Leila Benerradi, Berenice Collignon, and Anish Umasuthan Edited by Molly Flanagan, Declan Forde, and Jing Hang Pp. 25-36

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Financial Crashes and Recessions: The Debt Deflation Route Written By Rohaim Khan Edited by Kaifuzzaman Khan, Tahsin Kabir Etul, and Declan Forde Pp. 37-44

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5.

The Problem on our Plates: Evaluating the Carbon Abatement Effects of an Excise Tax on Beef in the United States Retail Market Written by Josh Holtzman, Brian Kehoe, and Jack Kline Edited by Caleb Sansom, Nada Abdelhamid, and Ava Liang Pp. 45-54

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Understanding the Efficient Market Hypothesis Written by Maya Sorguc Edited by Declan Forde, Jing Hang, and Mariel Yacolca Maguiña Pp. 55-61

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Canada’s Carbon Tax Scheme: Analysis of the Current System and Recommendations for the Future Written by Raya Ayoub, Camila Bayona, James Dinh, Lola Luhmann, and Zhaodong Wang Edited by Nada Abdelhamid, Jing Hang, and Molly Flanagan Pp. 62-74

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John Stuart Mill on the Merits of Colonization Written by Sophie Strassmann Edited by Jing Hang, Caleb Sansom, and Nada Abdelhamid Pp. 75-80

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Analyzing Dental Care in Canada Written by Prattasha Bhuyan, Jiaxin Fang, Atharva Shirsat, Yin Lai Wang, and Marine Youm Edited by Ava Liang, Mariel Yacolca Maguiña, and Tahsin Kabir Etul Pp. 81-93

10. Urbanisation in China: A Case Study on Economic and Technical Development Zones, Shenzhen Written by Kelly Yeung Edited by Molly Flanagan, Mariel Yacolca Maguiña, and Caleb Sansom Pp. 94-104

11. Further Information on The McGill Journal of Economics The Staff-Writing Team Pp. 105-106

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A Letter from the Editor-in-Chief Dear Reader, I am proud to introduce this year’s edition of the McGill Journal of Economics . This instalment showcases ten of the best undergraduate economics papers written during 2021-2022 at McGill, and is a testament to the relentless effort of the editorial team who worked to produce this publication.

As an executive of the MJE , I am pleased to see that the journal is gaining momentum following our multi-year hiatus which ended in 2020. This year, we received a wide array of papers and are grateful to all the students who submitted their work. New members also joined our editorial group, in addition to our parallel op-ed writing team which doubled relative to last year (see page 106).

This year, the journal’s major focus on public policy reflects the significance of the environmental, political, and epidemiological events that have recently shocked the world. Several papers explore vaccine externalities, pollution and emission control, healthcare systems, and unconventional monetary policy; others engage with development and macroeconomic principles, as well as examine the modern relevance of influential theories.

Together, these ten papers demonstrate the numerous ways McGill students are eager to apply their economic education to evaluate the real world and explore positive social change.

The journal you are about to read has been carefully curated by the MJE ’s editorial team, whose work I applaud and whose names you will find on the following page. A special thanks goes out to our Managing Editor Claire Chang, who drove the entire editorial process and has produced a publication of excellent quality. Note that the editorial work is one facet of the MJE, and I hence want to thank our second Managing Editor Nadira Anzum for overseeing our online op-ed publications and contributing to this journal. In addition, the MJE is the fruit of our collaboration with the Economics Student Association; I would thus like to thank Abdullah Khan and Isabella Tortone for their continued support throughout. Finally, the MJE strives to be an open project within the university’s economics department, and we are therefore grateful for Professor Julian Karaguesian whose recognition and words of encouragement were deeply appreciated.

I want to end this prefatory note by recalling that the journal has as its primary objective to elevate the work of McGill students and spark economic discussions within the undergraduate community. I hope you will be pleased, enlightened, and intellectually stimulated by the wonderful papers included in this year’s edition of the MJE. Adam Chatelan Editor-in-Chief McGill Journal of Economics

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Editorial Team* Editor-in-Chief Adam Chatelan Managing Editor Claire Chang Editors Nada Abdelhamid Tahsin Kabir Etul Molly Flanagan Declan Forde Jing Hang Kaifuzzaman Khan Ava Liang Mariel Yacolca Maguifia Caleb Sansom

*The editorial team represents the MJE members responsible for this journal. Please consult page 106 to view the MJE staff-writers who regularly produce op-ed materials on our website.

Examining the Positive External Bene ts Associated with COVID-19 Vaccines from the Perspective of Public Policy Makers

by Utilizing the SIRD Epidemiological Model

By Azwar Ali, Abdullah Khan, and Sohaib Zaheer Written for ECON 408: Public Sector Economics I Edited by Tahsin Kabir Etul, Kaifuzzaman Khan, and Ava Liang

Abstract On the 30th of January 2020, the World Health Organization declared the COVID-19 outbreak as an ‘International Public Health Emergency.’ With most of the world heading into lockdown, the virus has paralyzed the global economy—leading to deep recessionary output gaps.1 As a result, governments have been trying to understand the coronavirus and the intervention methods that can be utilized to maximize social welfare and restart the global economy. Many economists believe that vaccine immunity is the only sustainable way out of the pandemic. Hence, all G7 nations have opted to fully subsidize the development of vaccines and categorize its distribution as a public good for all citizens. Essentially, governments believe that the total social benefit associated with inoculations of vaccines outweigh the cost to provide all vaccines for free. In principle, we believe that the Canadian government’s free vaccine mandate is a valid intervention. This research paper aims to understand how governments substantiate these policy decisions on a more quantitative level and will attempt to model the hypothesized positive marginal social benefit associated with the inoculation of COVID-19 vaccines (Marginal External Benefit from Vaccinations, MEV).

To ascertain this, we introduce a Susceptible-Infectious-Recovered (SIR) epidemiological model built with current COVID-19 data and adjust to allow for a fourth variable: ‘vaccinated’ individuals (V). Our data shows that the hypothesized MEV exists, whilst shedding some light on the apparent ‘free rider’ problem associated with individuals that choose not to take the vaccine.

Keywords: COVID-19, Marginal External Benefit, Recession, Public Policy, Public Goods, Free Rider Problem, Merit Goods, Vaccines.

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Sanchez, J. M. (2021, September 26). COVID-19's Economic Impact around the World

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I Introduction of the SIR model The SIR model is a generic compartmental model used by epidemiologists to understand the progression of infectious diseases in a controlled population. In this model, there are three key compartments: “S” stands for “Susceptible,” “I” for “Infectious,” and “R” for “Recovered.” The model starts with 999 individuals that are ‘Susceptible,” ergo, they have not yet contracted the infectious disease, but as the infection spreads, they may potentially contract the disease. Now, one infected individual is introduced into the controlled system. This individual can infect a susceptible individual with a rate of ‘β’ (Beta). Therefore, the infected compartment grows by the rate of ‘β.’ The Infected pool is also reduced by the rate of recovery, which is denoted as ‘ɣ’ (Gamma). At a rate of ‘ɣ,’ infected individuals convert into recovered cases. The SIR model is important in helping governments and epidemiologists understand the ‘steady state’ of infectious diseases. Beta and Gamma values were sourced from publicly available research data collected on the characteristics of COVID-19 in Canada.2 Appendix A demonstrates the compartmental equations in the SIR model.

The classic SIR model created by Kermack and McKendrick makes several simplifying assumptions that must be addressed in the context of COVID-19 before moving forward. The SIR model assumes a fixed population size, and as explained above, this paper specifically uses 1000 individuals to simulate the dynamics of COVID-19. A ‘representative’ model would consider the implications of Birth Rates, Death Rates, and Migration in the SIR model. The classic SIR model also assumes that individuals mix arbitrarily, like particle collisions in ‘Brownian Motion.’ In the context of COVID-19, the initial exponential spread of the virus was caused by mass congregations of humans—this may mean that the SIR model inherently underestimates the spread of the coronavirus. On the other hand, the SIR model does not take into consideration health and safety measures such as lockdowns, mask-wearing, and isolation mandates that help reduce the rate of disease transmission. Many derivatives of the SIR model work around this issue by modeling factors such as ‘human behavior’ and reduced social contact.

In this paper, we have decided to avoid delving into this form of complexity as it is not the main goal of the research question. The classic SIR model also assumes that there is no incubation period between contact with an infected individual and becoming symptomatic. In contrast, COVID-19 has a distinct 5–7-day incubation period between virus contact and the first sign of symptoms.3 Now, with an understanding of the advantages and simplifying assumptions of the model, we present the SIR model for COVID-19 based on publicly available information.4 2

Jayatilaka, R., Patel, R., Brar, M., Tang, Y., Jisrawi, N. M., Chishtie, F., Drozd, J., & Valluri, S. R. (2021).

A Mathematical Model of Covid-19 Transmission. Materials Today: Proceedings 3 Nikolaou, M. (2020). A fundamental inconsistency in the SIR model structure and proposed remedies 4 Appendix B, Table 1: Key SIR Variables collected from COVID-19 in Canada (R. Jayatilaka et al, 2021); Appendix C, Figure 2: SIR Model for COVID-19, based on Canadian Beta and Gamma estimates in a representative population of 1000 individuals.

Examining the Positive External Bene ts Associated with COVID-19 Vaccines from the Perspective of Public Policy Makers by Utilizing the SIRD Epidemiological Model

The SIR model predicts that at a steady state, 87.6% of the population will contract COVID-19.

This speaks to the rapid transmissibility of COVID-19 and demonstrates the severity of the virus on our society if proactive measures are not taken to hinder its spread. In the next section of this paper, we will adjust the SIR model to incorporate the advent of vaccines and the positive externality associated with inoculations.

II Mathematical Derivation of the SIR - Vaccinated Model The basics of the compartmental SIR model has been highlighted in the section above, where the total population (N = 1000), will remain as a sum of each individual component. The function ‘mV’ is introduced as a fourth compartment to represent vaccinated individuals. Mathematically, given more vaccinated individuals, this will reduce the susceptible population. 𝑁 = 𝑆 + 𝐼 + 𝑅 + 𝑚𝑉 The parameter ‘m’ is the measure of the effectiveness of the vaccine, or the proportion of vaccinated individuals that can neither catch nor transmit the virus. Given the advancements of mRNA technology, new COVID-19 vaccines come with 95% efficacy.

The rate of change of the susceptible population declines over time as: 𝑑𝑆 𝑑𝑡

= β

𝑆(𝑡)𝐼(𝑡) 𝑁

Where β is the product of contact rate between the susceptible and infectives and measure of the probability of transmission of the disease.

The rate of change in the infective population is given as: 𝑑𝐼 𝑑𝑡

= β

𝑆(𝑡)𝐼(𝑡) 𝑁

− γ 𝐼(𝑡)

Where ‘ɣ ’ is the recovery rate. Hence, we can say the difference between the susceptible population that is infected and infected people that are recovering is the change in infected size.

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The rate of recovery is given by: 𝑑𝑅 𝑑𝑡

= γ 𝐼(𝑡)

If βS(t)I(t)/N < ɣI(t), the rate of people recovering is greater than the rate of people being infected by the virus. This means that the number of infected individuals declines over time and the pandemic comes to an end. If βS(t)I(t)/N > ɣI(t), the number of individuals infected by the virus are greater than the recovered population, and we have an epidemic. The above inequality can be expressed as following: β

𝑆(𝑡)𝐼(𝑡) 𝑁 𝑆(𝑡) 𝑁

β

< γ𝐼(𝑡) < γ

𝑆(𝑡) < γ

𝑁 β

The contact number is given by ɣ/β is and expressed by the parameter ‘σ’: β γ

σ =

𝑁 σ

𝑆(𝑡) < 1 σ

𝑠 <

S(t)/N is the proportion of individuals that are susceptible to the virus and is denoted by ‘s.’

1 σ 1 σ

Hence, we conclude that 𝑠 < of susceptible individuals 𝑠 =

. The number of infective individuals rises until the proportion . After this point, there is a decline in the amount of infected

individuals.

When the virus spreads, there is a fraction of susceptible individuals that remain uninfected by −σ 𝑟(∞)

the virus denoted by s(∞), where s(∞) = 𝑠𝑒

infected individuals and is equal to s + i + s (∞) where ‘i’ is individuals: r (∞) = s + i +s (∞) s (∞) = r (∞) - s - i ------- (1) −σ 𝑟(∞)

As mentioned earlier s(∞) = 𝑠𝑒

------ (2)

𝐼

. The symbol ‘r(∞)’ represents the fraction of 𝑁

and the proportion of infected

Examining the Positive External Bene ts Associated with COVID-19 Vaccines from the Perspective of Public Policy Makers by Utilizing the SIRD Epidemiological Model

Equating (1) and (2): −σ 𝑟(∞)

𝑠𝑒

= r (∞) - s - i

In the SIR model, MEV is given by: −𝑑𝑅(∞) 𝑑𝑉

MEV = −σ 𝑟(∞)

We multiply 𝑠𝑒 = r (∞) - s - i with N and then substitute the values of ‘I’ from the given equation of N = S + I + R + mV. −σ 𝑟(∞)

N ( 𝑠𝑒

= r (∞) - s – i)

−σ 𝑟(∞)

𝑆𝑒 = R(∞) – S – I I = N – S - R -mV −σ 𝑟(∞)

𝑆𝑒

= R(∞) – S – N + S+ R + mV

After substituting ‘I’ we differentiate the resulting equation with respect to ‘V’, which gives us the following formula for MEV. MEV =

−𝑑𝑅(∞) 𝑑𝑉

−σ𝑟(∞)

=

𝑚(1−𝑒

)

−σ 𝑟(∞)

1−𝑠 𝑒

The above formula derived for MEV implies that the marginal effect of vaccination is never constant. For the graphical representation of MEV we input the data for s and r(∞) in the above equation with a vaccine efficacy of 95%, meaning m = 0.95.

From Figure 3,5 we can tell that the marginal effect of the first vaccine is greater than 1, and the MEV continues to rise until we reach a point when s = 1/σ after which we can see a fall with additional vaccinations. We have adapted this formula from common literature available on the SIRV model and a seminal paper written by Robert S Goldfarb and Bryan Boulier from George Washington University.

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Appendix D, Figure 3: Marginal Benefit of Vaccinations as a function of the number of vaccinated individuals in a sample population of 1000

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III Data Analysis and Implications Having derived the marginal social benefit of vaccine inoculations and graphically represented the data, we can now discuss the implications of these results on the decisions implemented by policy makers. As hypothesized, the data supports the initial claim that vaccines provide positive marginal social benefit which is greater than the benefit that an individual receives by taking the vaccine. By taking the vaccine, the MEV model assumes the individual has sterilizing immunity against the infectious disease, which also means the individual cannot transmit the disease onto another ‘unvaccinated’ (susceptible) individual. This is precisely where the positive spillover effect associated with vaccine uptake is derived. On a simple Supply-Demand graph, if there is a good with positive social benefit from consumption, it increases the optimal output quantity. This means that the government must take steps to ensure that more citizens have access to the good so that the socially optimal quantity can be consumed.

By looking at Figure 3,6 we notice that the MEV associated with each extra vaccine shot between 0 and 576 is greater than 1. The noticeable drop in the MEV of vaccines beyond the critical number of 576 can be explained by the ‘free-rider’ problem. As society gains immunity from COVID-19 through vaccines, the chances of an unvaccinated individual contracting COVID-19 become lower, hence, given the reduced risks of COVID-19, the marginal benefit derived by taking the vaccine trends downwards as well. From a public policy standpoint, a 100% subsidy for vaccines should be an adequate incentive for every individual with a positive MEV to take the vaccine. It is also important to understand that if we want to supply the socially optimal level of vaccines to society (demanders), the presence of the government is a necessity, as Coase’s Theorem does not apply between the suppliers and demanders of vaccines. In a free market, pharmaceuticals may choose to price-discriminate, as they have a monopoly for new COVID-19 vaccines. An example of this can be found in India, where vaccines manufactured and sold by the Serum Institute of India were considered too expensive for the Indian population. The central government of India was forced to negotiate with the monopoly to reduce prices of vaccines.7 One peculiar feature of MEV graph 3 is the negative attributed MEV for vaccinations above 922.

This might be a shortcoming of the formula that we have derived to understand the marginal benefit of vaccines. Even though the graph does help us understand the positive externalities and free-rider problem associated with vaccinations, it would not make sense for a vaccine to ever lead to negative MEV.

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Appendix D, Figure 3 Sharma, R. (2021, June 14). Central govt likely to renegotiate the price at which it buys Covaxin, Covishield

Examining the Positive External Bene ts Associated with COVID-19 Vaccines from the Perspective of Public Policy Makers by Utilizing the SIRD Epidemiological Model

IV SIRD Model and Implications We are cognizant that the basic SIR model omits one essential characteristic of COVID-19, which is the incidence of deaths for individuals that have contracted COVID-19. To work around this, the Susceptible-Infected-Recovered-Deceased (SIRD) model can be used to account for deaths in the COVID-19 simulation. Now, with the addition of a new variable—the death rate—denoted as ‘μ’ (Mu), we anticipate that there will be fewer ‘Recovered’ individuals, as a portion of these individuals will enter the ‘Deceased’ pool at a rate of ‘μ’ X Infected individuals.

The ‘μ’ rate for COVID-19 is approximated to be 0.01. Figure 48 shows the SIRD model for COVID-19.

In this scenario, the need for vaccines should be higher, as fewer recoveries and more deaths have a greater implicit impact on the economy. We therefore hypothesize that the marginal benefit associated with vaccinations will be higher in the SIRD model. This is demonstrated with Figure 59.

In Figure 5, the initial MEV associated with the first vaccination (1.22) is greater than that for graph Y (1.81). This evidence supports our earlier inference that modeling a death rate for infected individuals should increase the external benefit that society yields from vaccines.

Furthermore, the local maximum MEV in the SIRD model (1.29), is higher than the maximum in the SIR Model (1.23).

The situation with respect to COVID-19 is rapidly evolving, and with the potential rise of new variants, governments will have to continually reassess their vaccine policy and economic planning. Our MEV model provided along with this essay has built-in flexibility, so that anyone can conduct their own analysis by changing variables such as the efficacy and transmissibility of the virus. Appendix G shows how the MEV function changes if we reduce the efficacy of vaccines to 40% (which could be the potential case with the new Omicron variant). This demonstration highlights that our graphical models are dynamic and can be used to explain future changes in COVID-19.

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Appendix E, Figure 4: The SIRD Model for COVID-19 Appendix F, Figure 5: Marginal External Benefits from Vaccinations within the SIRD model

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V Economic Interpretation of Vaccine Mandate As stated in our earlier discussions, marginal social benefits derived from demand drivers are the sum of marginal private benefits of consumption and marginal external benefits of consumption.

The marginal social benefit encapsulates the total benefit to society from the consumption of an additional unit of a good or service. In this paper, we show clear evidence that supports the notion that vaccine inoculations lead to greater marginal social benefits, as the external benefits derived from vaccine immunity help protect other citizens in society. It is the government's goal to manage taxpayer wealth and spend it in areas that will maximize social welfare. We posit that given the strong marginal external benefits of vaccination defined in graphs 3 and 5, the government can justify the use of taxpayer funds to fully subsidize vaccines for citizens. An important paper written by Kremer and Glennerset in 2004 substantiates a 100% subsidy policy.

As a result of the subsidy for citizens, the demand for vaccines (defined as the marginal private benefit) will shift rightwards to intersect with marginal social benefit at a socially optimal level.

This would reduce the deadweight loss that was initially associated with the lack of consumption and production of vaccines in the private market. Realistically, this socially optimal level would be the population percentage that helps Canadian society reach herd immunity.

The government of Canada has been working to ensure that vaccines are both non-exclusive and non-rivalrous. By ensuring free vaccines for all residents, the government has taken a positive step forward in ensuring that sections of society are not excluded from the vaccine rollout initiative. Hypothetically, if residents had to pay to get vaccines, there would be portions of society that would not opt to take the vaccine. These sections of society would predominantly be of lower income, where their marginal private benefit associated with vaccinating is lower than the private cost/burden of taking the vaccine. This form of ‘price discrimination’ essentially reduces the quantity of vaccines consumed and will only prolong the virus outbreak.

Governments can effectively use marketing campaigns to inform citizens of the benefits of vaccines whilst alleviating worries around potential side-effects from vaccines to improve citizen’s willingness to get vaccinated. To ensure that the vaccine is non-rivalrous, the government of Canada has ensured that there is ample supply of vaccines with equitable distribution in all provinces.

As witnessed in 2020, there is a definite tradeoff between lockdown mandates used to reduce infection rates and their impact on economic productivity. With vaccines, governments can attempt to safely ease lockdowns to get people back to work. A new major policy problem revolves around who should be vaccinated first. One school of thought believes individuals 55

Examining the Positive External Bene ts Associated with COVID-19 Vaccines from the Perspective of Public Policy Makers by Utilizing the SIRD Epidemiological Model

years and older should be vaccinated first to reduce death rates associated with COVID-19.10 The other school of thought argues that the 21 to 45 age group should be vaccinated first, as they are the most productive age bracket with the highest contact rate amongst all other age groups.

Canada and many other advanced economies have decided to vaccinate the eldest age group first, which could be a result of some analysis they have conducted on the tradeoff between economic productivity and deaths. Further analysis would look to answer this question and how to effectively allocate vaccines within a society.

VI Conclusion The data supports the initial claim that vaccines provide positive marginal social benefit which is greater than the benefit that an individual receives by taking the vaccine. This information could be used by public policy analysts and government officials to make a better-informed decision around vaccine mandates. The data could help rationalize the use of taxpayer funds to incentivize Canadians to get vaccinated. The differential equations presented, and the resulting graphs, also provide an explanation for reduced rates of vaccination in Canada. As we can see, the MEV declines beyond a critical vaccination number, and even turns negative. This could be a visualization of the free-rider problem; some individuals that are unwilling to take the COVID-19 vaccine may feel that the herd immunity generated by others in society is sufficient protection.11

VII Appendices Appendix A Figure 1: Visualization of SIR Compartmental Model

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Sunohara, S., Asakura, T., Kimura, T., Ozawa, S., Oshima, S., Yamauchi, D., & Tamakoshi, A. (n.d.). Effective vaccine allocation strategies, balancing economy with infection control against COVID-19 in Japan 11 Soares, P., Rocha, J. V., Moniz, M., Gama, A., Laires, P. A., Pedro, A. R., . . . Nunes, C. (2021, March 22). Factors Associated with COVID-19 Vaccine Hesitancy

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Appendix B Table 1: Key SIR Variables collected from COVID-19 in Canada (R. Jayatilaka et al, 2021) Variable Value Beta 0.19626 Gamma 0.08344

Appendix C Figure 2: SIR Model for COVID-19, based on Canadian Beta and Gamma estimates in a representative population of 1000 individuals.

Examining the Positive External Bene ts Associated with COVID-19 Vaccines from the Perspective of Public Policy Makers by Utilizing the SIRD Epidemiological Model

Appendix D Figure 3: Marginal Benefit of Vaccinations as a function of the number of vaccinated individuals in a sample population of 1000.

Appendix E Figure 4: The SIRD Model for COVID-19.

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Appendix F Figure 5: Marginal External Benefits from Vaccinations within the SIRD model.

Appendix G Figure 6: Marginal External Benefit from Vaccinations with vaccine efficacy of 0.4 (40%).

Examining the Positive External Bene ts Associated with COVID-19 Vaccines from the Perspective of Public Policy Makers by Utilizing the SIRD Epidemiological Model

VIII References Alexis A. Crow and Samir Saran. (2021, May 25). The Global Trade Map After COVID-19: Where to for Global Companies and Investors, and Policymakers? Retrieved from https://www.orfonline.org/research/the-global-trade-map-after-covid-19/ Chang-Tai Hsieh describes the importance of Chinese local governments providing "special deals" for favored private firms. (n.d.).

Hoek, J. M., Field, S. M., Vries, Y. A., Linde, M., Pittelkow, M., Muradchanian, J., & Ravenzwaaij, D. V. (n.d.). Rethinking remdesivir for COVID-19: A Bayesian reanalysis of trial findings. Retrieved from https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0255093 Jayatilaka, R., Patel, R., Brar, M., Tang, Y., Jisrawi, N. M., Chishtie, F., Drozd, J., &amp; Valluri, S. R. (2021). A Mathematical Model of Covid-19 Transmission. Materials Today: Proceedings. https://doi.org/10.1016/j.matpr.2021.11.480 Michael Kremer Describes the Economics of Vaccine Development and Distribution. (n.d.).

Retrieved from: https://www.nber.org/affiliated-scholars/researchspotlight/michael-kremer-describeseconom ics-vaccine-development-and-distribution

Nikolaou, M. (2020). A fundamental inconsistency in the SIR model structure and proposed remedies. https://doi.org/10.1101/2020.04.26.20080960 Padhan, R., & Prabheesh, K. P. (2021, June). The economics of COVID-19 pandemic: A survey.

Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7906538/ Sanchez, J. M. (2021, September 26). COVID-19's Economic Impact around the World.

Retrieved from https://www.stlouisfed.org/publications/regional-economist/third-quarter-2021/covid19seco nomic-impact-world.

Sharma, R. (2021, June 14). Central govt likely to renegotiate the price at which it buys Covaxin, Covishield. News18. Retrieved December 8, 2021, from https://www.news18.com/news/india/centre-may-renegotiate-covid-vaccine-pricing-withma nufacturers-as-new-policy-comes-into-effect-next-week-3846584.html

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Soares, P., Rocha, J. V., Moniz, M., Gama, A., Laires, P. A., Pedro, A. R., . . . Nunes, C. (2021, March 22). Factors Associated with COVID-19 Vaccine Hesitancy. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8004673/ Sunohara, S., Asakura, T., Kimura, T., Ozawa, S., Oshima, S., Yamauchi, D., & Tamakoshi, A. (n.d.). Effective vaccine allocation strategies, balancing economy with infection control against COVID-19 in Japan. Retrieved from https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0257107 Trogen, B., & Pirofski, L. (2021, May 14). Understanding vaccine hesitancy in COVID-19.

Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8030992/ Vishwanath, J. L., Fox-Dichter, S. R., Cooper, A. G., Heitzig, C., Prasad, A. K., Stevenson, B., Milesi-Ferretti, G. M. (n.d.). Aloysius Uche Ordu. Retrieved from https:// www.brookings.edu/topic/coronavirus-covid-19-economics/

Using Helicopter Money in the Context of the Eurozone’s Response to the COVID-19 Economic Crisis

By Ludovic Tillette de Clermont-Tonnerre Written for ECON 302: Money, Banking, and Government Policy Edited by Ava Liang, Nada Abdelhamid, and Kaifuzzaman Khan

Abstract The European Central Bank (ECB) announced the injection of €750 billion into financial markets via a quantitative easing (QE) policy as a response to the COVID-19 crisis. Rather than orienting the printing press towards financial markets, why not shift the focus towards actors of the real economy, i.e. companies, individuals, and states? This paper discusses the merits of “helicopter money,” which uses the central bank's printing press to deliver grants to specific economic agents. Conventional monetary policy tools aim to expand the monetary base and lower interest rates to stabilize the economy. However, when there is a full-scale crisis, like the one following the worldwide spread of the COVID-19 virus, central banks need non-conventional tools in order to stimulate slowing economies.1 Despite never intending to put it into practice, Milton Friedman’s concept of “helicopter money” is making headway in current economic debates.

While many economists argue against the implementation of helicopter money, this non-conventional monetary policy tool could be a realistic component of the economic response to the COVID-19 induced recession.2 This paper will start by determining when helicopter money can be used and will outline the different perspectives regarding the enactment of a helicopter money policy within the European Union (EU).

(The economy of the Eurozone will be represented by the graph in Appendix A. Throughout the paper, production capacity is determined by consumption and investment, and credits from commercial banks will be considered part of the printing press process. The rest of the printing press process occurs when central banks inject liquidity on financial markets via quantitative easing (QE).)

1

Frederic, M. S., & Apostolos, S. (n.d.). “The Economics of Money, Banking, and Financial Markets” (Seventh Canadian Edition ed.

2 Milton, F. (1969). "The optimum quantity of money". In The Optimum Quantity of Money and Other Essays (Chapter 1)

16

I Situations in which Helicopter Money Policies can be Implemented First, it is important to understand that helicopter money can only be used in certain situations. A financial crisis usually occurs when a speculative bubble pops in the financial markets. There are numerous reasons why such bubbles pop, but in every case, commercial banks are contaminated by a crash in prices and face a rapid increase in demand for liquid assets. This short-notice surge leaves banks unable to finance the demands of the real economy, which leads to a contraction in both production and demand. Because prices on financial markets have crashed and banks are unable to issue as much credit, consumers and investors panic and save their excess income instead of spending it on consumption goods. This reduction in demand, combined with the banks’ now limited credit power, results in less production at the macroeconomic level. The decrease in consumption also leads to a decrease in revenues as well as a readjustment of supply relative to demand. In real terms, this means an increase in the number of layoffs and a decrease in investment levels. An increase in unemployment leads to less purchasing power, hence a further decrease in consumption, and so on and so forth. Even though the production capacity still exists (i.e. factories, offices, the labor force, etc. have not disappeared) there is simply not enough spending on goods and investment to return production to its pre-crisis levels.

This was the case when countries in the Eurozone (and the rest of the world) came out of COVID-19 lockdowns. The decrease in spending on leisure and consumption goods, as well as the subsequent layoffs, meant that consumption decreased even as production capacity had not disappeared. Traditionally, there are two ways to bring back spending. The first method asks central banks to inject liquidity into financial markets in order to increase people’s savings, which, all else held constant, should augment the level of spending within the economy. This is known as ‘action through monetary policy.’ The other option is for governments to use fiscal policy to boost production and stimulate consumption levels. This can be done by decreasing taxes, increasing wages, or by boosting the amounts allocated by governmental welfare benefits.

However, responding to a crisis via fiscal policy is by nature unilateral. Thus, such action depends on the political orientations of the individual governments in power at the time.

Nevertheless, “countries in the European Union, particularly those that share the Euro, coordinate their economic and fiscal policies throughout the year to ensure their alignment with common objectives and responsibilities”.3 This makes individualistic fiscal policies unviable in the Eurozone, and joint fiscal policy responses to crises dependent on the most prominent countries within the EU, namely Germany and France.

Helicopter money, a term popularized by Milton Friedman in 1969, is the idea that central banks hand out grants to households, companies, and governments directly. This policy can be 3

Economic and fiscal policy coordination | European Commission. (n.d.)

Using Helicopter Money in the Context of the Eurozone’s Response to the Covid-19 Economic Crisis

implemented directly through the central bank, which would finance its stimulus program by issuing debt on financial markets. Friedman argued that if cash was to be thrown out of a helicopter, all else held constant, the only effect would be a sharp hike in prices and there would be no lasting positive effect on the economy as a whole.4 In other words, for economists using models like Friedman’s, helicopter money can only lead to inflation.

Overall, it seems monetary action via helicopter money can only be implemented in certain particular economic contexts, like the economic crisis following the COVID-19 pandemic.

II Arguments in Support of Helicopter Money Policies Debates about the concretization of helicopter money policies have accelerated since the end of lockdowns in the Eurozone. There are many economic arguments as to why such policies should be enacted. For instance, one of the effects of a helicopter cash drop would be an increase in aggregate demand. “Indeed, if you think there is some chance that others will spend the money, raising the price level, you will want to spend your new cash soon, so as to preserve its value against forthcoming price inflation.”5 This underlines one of the major advantages of helicopter money: it is put in people’s pockets, directly where it is needed and most likely to be spent.

Conversely, the most likely scenario for a lack of increase in aggregate demand is simply that the “helicopter drop is so small that […] people treat the new cash as a transfer purely to themselves, the precautionary motive for saving is strong, and so the new money is simply (saved). A larger helicopter drop should overcome that inertia.”6 A drop of helicopter money would also lead to states and households limiting their levels of debt.

Indeed, helicopter money would help stimulate an economy by boosting aggregate demand and would support governments’ recovery programs by limiting their borrowing on financial markets.

In addition, “helicopter money would contribute to limiting the increase of private debt, as vulnerable households would be able to use it to pay off their debts or bills, consumer credits […] incurred by the containment measures and the temporary loss of salaries and incomes.”7 Lastly, helicopter money would send a positive message to households and companies. The announcement of such a policy would encourage companies to increase their production capacity, or at least limit layoffs.8 It would also rebuild confidence, sending the message that Europe is able to and willing to deliver concrete policies that benefit everyone directly.

4

Milton, F. (1969) Cowen, T. (2010, July 14). "Will a helicopter drop of money stimulate aggregate demand?" Marginal Revolution 6 Cowen, T. (2010) 7 Jourdan, S. (2020). Helicopter money as a response to the COVID-19 recession in the Eurozone. Positive Money Europe.

8 Jourdan, S. (2020) 5

18

III Arguments Opposing Helicopter Money Policies By contrast, there are some economic arguments, in addition to Friedman’s original observations, that oppose the implementation of helicopter money policies.9 Firstly, it can be argued that helicopter money will be used to consume foreign goods and not local ones. The wider context of globalization has made cheaper foreign markets accessible to consumers worldwide. However, in the case of a helicopter money policy within the EU, the same amount of money would be given to every European citizen. As a result, imports and exports within Europe would grow by an amount equal to the drop. This means, for example, that even though Irish people might have more money to buy European goods, Europeans will also have more money to buy Irish goods.

Thus a helicopter money program within the EU would cancel out the negative effects of an increase in imports with a subsequent increase in exports. Even though the commercial balance with other European countries is likely to remain stable in such a scenario, it can be said that people are more likely to consume cheaper extra-European goods (i.e. Brazilian beef, Colombian coffee), while people outside of Europe who have not received similar stimulus packages will not consume more expensive European goods. Nevertheless, the data shows that for every 100 euros spent in France, a high percentage (90%+) of income is spent within the same country.10 This makes sense because the biggest fraction of a household’s or company’s income is spent on rent, which are local services in most cases. Hence, an increase in European consumption stimulates both Eurozone economies and those outside of it, and extra-European imports and commercial balances within the EU are a minor problem.

It can also be argued that helicopter monetary policies would lead to an increase in inflation, as the essence of such programs is to increase the supply of money.11 The credit crunch ensuing the 2007-2008 global financial crisis led to a decrease in the money supply, which is why the central bank’s role of injecting liquidity in markets in order to bring the money supply curve back to its original position did not set off inflation. COVID-19 however, hasn’t led to a reduction in money supply, so it can be argued that a helicopter money program could lead to inflation. Indeed, the conclusion of monetarist economic models is that monetary creation isn’t a “miracle treatment, solution to all problems.”12 Notwithstanding these arguments, it is important to understand that “despite having injected 2.6 trillions euros through quantitative easing and having reduced interest rates to negative territory, inflation in the eurozone remains largely subdued, and did not reach the ECB’s target of close to but below two percent for the last 6 consecutive years.”13 Thus an increase in inflation resulting from helicopter cash, albeit minor, would be welcome by most.

9

Milton, F. (1969) Growth Lab at Harvard University. (2017). Atlas of economic complexity 11 Milton, F. (1969) 12 Pinter, J., & University, C. (2020, April 22). Opinion | Vous ne pensiez tout de même pas que « l'hélicoptère monétaire » était la solution miracle ? Les Echos 13 Jourdan, S. (2020), see Appendix B 10

Using Helicopter Money in the Context of the Eurozone’s Response to the Covid-19 Economic Crisis

Another issue with helicopter money is the close coordination required between the ECB and different European governments for the implementation of such programs, “which may undermine bank independence over time to the detriment of sound monetary policy and encourage politicians to seek funding at will.”14 Even though other countries such as New Zealand are “discussing 'helicopter money' handouts to stimulate economy”,15 the question of the independence of the central bank is one of the major stalling points for the implementation of helicopter policies within the Eurozone, with the ECB being one of the most independent central banks in the world.

IV Central Bank Concerns In addition, some central bankers voice their concern over the increasing appetite for helicopter cash. The argument is that the main objective of the ECB is price stability, not the redistribution of consumer buying power. If Person A earns €10,000 per month, Person B earns €1,000 per month, and the central bank gives €100 to both people, it increases the buying power of Person B by 10% while only raising the buying power of Person A by 1%. This favors Person B, who would earn more money relative to Person A; this logic can be applied to firms as well as households. Indeed, distributing wealth and allocating resources is not the job of the central bank but rather that of the market and of a democratically elected government.16 Furthermore, the redistribution of wealth by governments should not aim to disrupt the rules of the market too much (the rules of 3% deficit and 60% debt established in the EU). Therefore, for central banks, giving out money directly to firms and households interferes with the principle of competitive markets. It is the same principle for governments. If the ECB is giving out money to governments instead of households and firms, it would help them disregard the 3% deficit and 60% debt rule.17 In addition, article 123 of TFEU18 explains that the ECB is not allowed to lend money to states;19 however, helicopter money comes in the form of grants rather than loans. Therefore, even though it is legally possible for the ECB to implement helicopter monetary policy, the policy interferes with the principles of competitive markets by redistributing wealth.

One solution would be to ask the European Parliament (the legal entity to which the ECB obeys) to create a democratically elected council that would decide on the fair distribution of helicopter money—this is the idea of Positive Money.20 In this case, the ECB would still be independent, 14

Mike, D. (2020, March 17). "Rotors spinning for 'helicopter money'". Reuters Swati, P. (2020, May 21). "New Zealand discussing 'helicopter money' handouts to stimulate economy". Reuters 16 Mike, D. (2020) 17 Stability and Growth Pact.

18 See Appendix C. 19 Jourdan, S. (2020) 20 Jourdan, S. (2020) 15

20

from a monetary point of view, and will still be able to choose the exact amount of liquidity it would inject in the system, but the way the cash is allocated between households and firms would be decided by a democratic organ.

V The Difficulty of Implementing Helicopter Money Policies Finally, some argue that there are other problems that make helicopter monetary policies difficult to implement. The first question is how helicopter money should be implemented. Intuitively, the solution would be to credit a certain amount on every individual’s bank account. Yet, some households and firms have multiple bank accounts within the country, and perhaps overseas, and others do not have a bank account at all. Therefore, helicopter policies require significant preparation and coordination between the ECB and the fiscal authorities of each country.

The second argument is that the ECB could become bankrupt.21 Even though it is impossible for a central bank to become bankrupt as long as it manipulates its own currency (liquidity) it can become bankrupt in the sense that its total debt can exceed its total assets (insolvency). However it is less important for public institutions to be solvent than private ones. For example, governments are almost always insolvent and it doesn’t matter much. Although the ECB is neither public or private, the problem of solvency arises even though there is little utility to submit central banks to that constraint. Indeed, this “rule” exists so as to reassure creditors that finance private firms. Yet a central bank does not have any creditors, since no one lends funds to finance its actions; naturally, the ECB does not need credit to finance itself since it creates its own money. This problem is more of a political one because an insolvent central bank (i.e. a central bank who owes more than it owns) creates panic among the general public. This can be used by politicians as an argument to discredit certain currencies.

21

Sumner, S. (2020)

Using Helicopter Money in the Context of the Eurozone’s Response to the Covid-19 Economic Crisis

VI Conclusion Overall, even though some central bankers express their concern over the increasing interest for a helicopter money drop it seems that implementing such a policy could be part of the solution to the Covid-19 economic crisis.22 Indeed, such a policy could help stimulate a stagnant economy and support government recovery programs by being part of a “broader package of mutually reinforcing measures.”23 However, one could point out that the economic activity in the pre-crisis period could be made more equal and more ecologically responsible, for example. Hence, rather than concentrating stimulus efforts around rebuilding the previous economy, one could suggest focusing on shaping a better one.

VII Appendices Appendix A

A Representation of the Eurozone Economy

22 23

Borio, C., Disyatat, P., & Anna Zabai. (2016, May 24). “Helicopter money: The illusion of a free lunch” Jourdan, S. (2020)

22

Appendix B

The European Inflation Rate Between 2016 and 2021 (Source: Trading Economics, 2022)

Appendix C

Article 123 of the Treaty of the Functioning of the European Union (Source: Consolidated Version of the TFEU 2020)

Using Helicopter Money in the Context of the Eurozone’s Response to the Covid-19 Economic Crisis

References Borio, C., Disyatat, P., & Anna Zabai. (2016, May 24). “Helicopter money: The illusion of a free lunch”. VOXEU. (https://voxeu.org/article/helicopter-money-illusion-free-lunch) Consolidated Version of the Treaty on the Functioning of the European Union (TFEU) [2020] OJ C202, https://lexparency.org/eu/TFEU/ART_123/.

Cowen, T. (2010, July 14). "Will a helicopter drop of money stimulate aggregate demand?"

Marginal Revolution. https://marginalrevolution.com/?s=helicopter+money Economic and fiscal policy coordination | European Commission. (n.d.). European Commission.

Retrieved December 8, 2020, from https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordinatio n_en Frederic, M. S., & Apostolos, S. (n.d.). “The Economics of Money, Banking, and Financial Markets” (Seventh Canadian Edition ed.). Pearson.

Frédéric, V. (2020, November 5). “Le secteur bancaire face à la crise du COVID”. Banque de France.

Growth Lab at Harvard University. (2017). Atlas of economic complexity. The Atlas of Economic Complexity. https://atlas.cid.harvard.edu Jasay, A. (2013, July 1). Helicopter Money and Stone-Age Banking. Econlib. https://www.econlib.org/library/Columns/y2013/Jasayhelicopter.html Jourdan, S. (2017, March 25). Helicopter money and basic income: friends or foes? | BIEN. Basic Income Earth Network. https://basicincome.org/news/2017/03/helicopter-money-basic-income-friends-or-foes/ Jourdan, S. (2020). Helicopter money as a response to the COVID-19 recession in the Eurozone.

Positive Money Europe. https://www.positivemoney.eu/wp-content/uploads/2020/03/Helicopter_Money_Covid.pd f Mike, D. (2020, March 17). "Rotors spinning for 'helicopter money'". Reuters. https://uk.reuters.com/article/idUKKBN21429N

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Milton, F. (1969). "The optimum quantity of money". In The Optimum Quantity of Money and Other Essays (Chapter 1). Adline Publishing Company: Chicago.

Pinter, J., & University, C. (2020, April 22). Opinion | Vous ne pensiez tout de même pas que « l'hélicoptère monétaire » était la solution miracle ? Les Echos. https://www.lesechos.fr/idees-debats/cercle/opinion-vous-ne-pensiez-tout-de-meme-pas-q ue-lhelicoptere-monetaire-etait-la-solution-miracle-1197196 Sumner, S. (2016, October 15). Open market operations vs. helicopter drops. Econlib. https://www.econlib.org/archives/2016/10/open_market_ope.html Swati, P. (2020, May 21). "New Zealand discussing 'helicopter money' handouts to stimulate economy". Reuters. https://uk.reuters.com/article/idUKKBN22Y036 Trading Economics. (2022). Euro Area Inflation Rate - February 2022 Data - 1991-2021 Historical - March Forecast. Trading Economics. https://tradingeconomics.com/euro-area/inflation-cpi

Implementing a Car-Free City Centre and Developing New Bike Lanes in Montreal

By Leila Benerradi, Berenice Collignon, and Anish Umasuthan Written for ECON 408: Public Sector Economics I Edited by Molly Flanagan, Declan Forde, and Jing Hang

Abstract The term 'car-free’ does not imply a city devoid of motorized vehicles, nor a reduction in total kilometers driven. Rather, as defined by Hartmutt Top and Tim Pharoah, it indicates a “city center where motor traffic is limited by an area-wide ban to that which is considered to be functionally necessary.” Essentially, ‘car-free’ refers to an administrative, regulatory measure that is based on road traffic laws.1 The Institut de la Statistique estimates that Quebec will be subject to an overall population increase of 1.1 million between 2016 and 2041, with ¾ of population growth in Greater Montreal.2 As the population of Montreal continues to grow, the city is faced with increasing downward pressures on its environmental stability and quality of life. Thus, this paper seeks to explore the potential of establishing a car-free city centre, as well as creating new bike lanes to facilitate carbon-neutral transport throughout the region to address these ever-growing issues. Various stakeholder perspectives are considered to understand the overall social costs and benefits that a city will experience when such policies are introduced. After the analysis, a recommendation for Montreal is provided, depending on two scenarios in which social benefits exceed social costs and vice versa.

1 2

Topp, H., & Pharoah, T. (1994). Car-free city centres. Transportation, 21(3), 231–247 Globe editorial: Canada’s cities are about to add millions of new residents. They can’t all drive to work. (2020)

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I Introduction Montreal is the second-largest city in Canada, and the most populous city in the province of Quebec, with over 1.7 million individuals.3 With the city currently producing approximately 2% of Canada's annual GHG emissions,4 Montreal has committed itself to achieving carbon neutrality by 2050.5 With ever-rising populations among urban communities worldwide, the risk of urban, environmental, and social problems continues to rise. To combat these issues, Montreal adopted the Climate Plan 2020-2030 aimed at reducing the use of fossil fuels in buildings, reducing food waste, and accelerating the adoption of more sustainable modes of transportation, among other goals. However, one effective initiative undertaken by numerous countries around the world includes creating car-free city centres (CFCCs) within their major urban regions, as well as developing a wide network of bike lanes. By observing the different positive and negative externalities induced by the implementation of a car-free city center, this paper aims to review whether Montreal should strive to create CFCCs and prioritize the creation of bike lanes to maximize social welfare and further the goals of achieving long-term carbon neutrality.

II External Benefits of creating Car Free City Centers (CFCC) Encouraging walking, cycling, and the reduction of carbon emissions have numerous long-term health benefits while furthering Montreal’s goal of achieving carbon neutrality. Daily commuting and high traffic areas lead to the release of carbon emissions; the accumulation of these emissions in the air is “...capable of increasing the risk of adverse health effects.”6 According to the World Health Organisation (WHO), "one-third of deaths from stroke, lung cancer, and heart disease are due to air pollution.”7 With transportation being the primary cause of air pollution in Montreal, a cultural shift in the approach towards travel within the city is necessary.8 Taking Oslo, which has implemented a CFCC, as an example, it is clear there exists a positive correlation between the improvement in air quality and the adoption of CFCCs. After creating a 1.9 km2 CFCC by gradually prohibiting access to vehicular circulation within the city center’s roads, Oslo witnessed a drastic decline in air pollution. The World Air Quality Index indicated that in January 2020, the average daily air pollution in Oslo fell far below the legal limit established by the government, an immense change from six years prior when daily pollution 3

Montreal Population 2021 – Canada Population. (2021). Canadapopulation.org Matthews, H. (2021). Montreal’s emissions targets for 1.5°C and 2°C global warming 5 Montréal, V. de. (2020). Montréal Climate Plan: Objective carbon-neutral by 2050 6 Montreal Air Quality Index (AQI) and Canada Air Pollution | AirVisual. (2021) 7 World Health Organization. (2021). How air pollution is destroying our health 8 Montreal Air Quality Index (AQI) and Canada Air Pollution | AirVisual. (2021) 4

Implementing a Car-Free City Centre and Developing New Bike Lanes in Montreal

levels were dangerously high.9 Although Montreal’s pollution levels are currently close to the WHO’s target of 10 µg/m3, if the increase in population is not decoupled from an increase in cars, it will lead to hazardous side effects.10 Creating both bike lanes and pedestrian areas can help promote the use of healthier modes of transportation. It was reported by the Canada Journal of Cardiology that CVD was "a major economic burden on the health care system" due to the direct and indirect costs linked with hospitalization, physician visits, medication, mortality, and morbidity.11 A British health study of 250,000 individuals found that those who biked and walked to commute “reduced their risk of cardiovascular disease (CVD) and cancer.”12 Another study examined the impact of implementing an $8 million bike lane project in New York City, estimating that the municipality’s probability of riding bikes increased by nearly ten percent and concluding that “investments in bike lanes are more cost-effective than the majority of preventive approaches [towards disease] used today,” which include medication, weight, and dietary regimes.13 However, the aforementioned study highlights the necessity to provide the adequate infrastructure to encourage physical activity and drastically reduce the risk of severe and costly health issues. By preemptively unburdening public healthcare and medical structures, it would allow resources to be allocated more efficiently to other public health sectors.

Creating a CFCC has also proven to be commercially beneficial, as it is positively correlated with an increase in business sales. Various cities have reported that an increase in safe bicycle lanes led to a rise in retail sales.14 According to a Portland State University study, cyclists spend more money on shopping overall than car-driving customers do (except in grocery stores) as they tend to visit businesses more frequently. Appendix B illustrates the increase in sales in avenues where the Municipality of New York created bike lanes, which corresponds to a surge in individual spending.15 A 2019 study of Copenhagen indicated that “society earned €0.64 (USD 0.74) for every kilometer cycled, versus a loss of €0.71 (USD 0.81) for every kilometer driven.”16 This underlines the overall increase in social welfare that augmenting the number of bicycle lanes can produce. Bicycle lanes are essential because they provide an alternative, carbon-neutral mode of

9

Neill, P. (2020, May 6). Could car-free cities be here to stay?

Montreal Air Quality Index (AQI) and Canada Air Pollution | AirVisual. (2021) 11 Tarride, J.-E., Lim, M., DesMeules, M., Luo, W., Burke, N., O’Reilly, D., Bowen, J., & Goeree, R. (2009). A review of the cost of cardiovascular disease. The Canadian Journal of Cardiology, 25(6), e195-202 12 Celis-Morales et al. (2017). Association between active commuting and incident cardiovascular disease, cancer, and mortality: prospective cohort study. BMJ, j1456 13 Gu, J., Mohit, B., & Muennig, P. A. (2016). The cost-effectiveness of bike lanes in New York City. Injury Prevention, 23(4), 239–243 14 The economic benefits of car-free streets. (2019). Copenhagenize Design Co 15 The economic benefits of car-free streets. (2019) 16 The economic benefits of car-free streets. (2019) 10

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transportation, and their practicality allows consumers to navigate cities with greater ease and mobility.

Developing more pedestrian-friendly areas also generates positive impacts for businesses.

Madrid’s city council indicated that retail sales increased by 9.5% on Madrid’s main shopping street after closing the city center to cars during the 2018 Christmas period, creating a ‘foot-traffic-only’ area.17 The aforementioned projects and their positive contributions to business sales show that creating both pedestrian-friendly streets and bicycle lanes can not only improve public health, but also provide the opportunity for businesses to increase their revenue while experiencing environmentally sustainable growth.

Lastly, the creation of a CFCC in combination with bike lanes across the city would require the development of a new urban layout, a major project that must consider the satisfaction of local residents. Through polls, various cities have been able to evaluate overall levels of contentment; in Lubeck, it was revealed that 85% of passers-by within the Lubeck city center evaluated the car ban as a ‘good’ or ‘very good’ initiative.18 Similarly, Oslo is currently the city with the highest “City Well Being Index,”19 due to its fine air quality and vast green spaces, among other reasons, many of which may be attributed to their CFCC program.20 In fact, Oslo was the first city to have fully committed to the CFCC initiative with its Car-Free Livability Program (CFLP), reflecting the positive relationship between a healthier city environment and the population’s overall well-being. By limiting access to private vehicles within designated areas and providing the opportunity for individuals to bike efficiently throughout the city, cities like Montreal are presented with the possibility to reduce air and noise pollution while increasing physical activity and providing greater access to green spaces.21

III External Costs of creating Car Free City Centers (CFCC) Although car-free city centers provide societies with numerous health and economic benefits, there still exist a variety of challenges that hinder the success of such programs, particularly in terms of affordability. As previously mentioned, increased foot traffic within pedestrian zones increases overall spending and revenues for businesses within these spaces. Naturally, as business owners recognize the growth potential present in CFCCs, there will be an increase in demand for these units, thereby exponentially raising the prices of rent. Topp and Pharoah (1994) explain 17

The economic benefits of car-free streets. (2019) Topp, H., & Pharoah, T. (1994) 19 The City Wellbeing Index: How happy are the world’s leading cities? (2020) 20 Neill, P. (2020, May 6) 21 Nieuwenhuijsen, M. J., & Khreis, H. (2016). Car free cities: Pathway to healthy urban living. Environment International, 94, 251–262 18

Implementing a Car-Free City Centre and Developing New Bike Lanes in Montreal

how economically weaker retailers can then be replaced by larger market players as fixed costs rise far beyond the range of affordability. This issue may result in the displacement of small businesses, ‘mom-and-pop’ shops, and other entrepreneurial ventures in favor of chain companies that can capitalize on the spaces that have priced out local competitors. There is also the tendency for mixed-use development areas to dissolve in favor of single-activity shopping zones or tourist centers aimed at maximizing profit based on floor-space and prime real estate.22 Ultimately, it is possible the introduction of CFCCs will eradicate the entrepreneurial visions of the local population, potentially even leading to large-scale gentrification efforts within city centers.

Creating CFCCs is also extremely costly and poses a great burden on taxpayers. For example, San Francisco’s approved Better Market Street Project will cost $604 million (USD) to create 2.2 miles (3.5 km) of its Market Street into a car-free zone. The establishment of CFCCs includes not only the cost of renovating existing pedestrian infrastructures, but creating safer spaces to encourage overall foot traffic in these areas. Some of these expenses may include upgrading traffic signals, making sidewalk improvements, replacing unhealthy foliage, and other similar initiatives.23 While it would be fallacious to believe that all CFCC initiatives would involve a $600 (USD) million investment, there exist hidden costs within the project that must be addressed. Cities with low budgets or tight financial restrictions for major infrastructure improvements would be unable to create a CFCC containing all the necessary developments to ensure long-term success. It is also necessary to consider the impact of car-free zones on the automobile industry. It is difficult to determine the actual losses the policy would induce due to the gradual implementation of CFCC policies and the lack of available studies; however, it could be argued that the program and the introduction of more bike lanes would induce a decrease in demand for cars and an increase in carbon-neutral modes of transportation. The implementation of CFCCs will reduce the utility and the demand for cars due to regulatory pressures against cars and a cultural shift towards a more active lifestyle that limits the use of automated vehicles. However, inducing an increase in more environment-friendly modes of transportation like bicycles could potentially offset economic losses incurred from the reduction in demand for cars.

22 23

Topp, H., & Pharoah, T. (1994) Common Questions - Official Market Street Improvement Initiative - City and County of San Francisco. (n.d.)

30

IV Impacted groups by proposal of CFCC in Montreal People with disabilities and the Elderly Quebec's Sustainable Mobility Policy and Action Plan were launched in 2017 to enhance public transportation; however, there are still several concerns to be addressed.24 47 out of 59 train stations and 56 out of 68 metro stations are not accessible for people who use a wheelchair, and bus access can also be challenging due to the lack of ramps and sidewalks.25 Omer Juma, a McGill alumnus, launched the project 4 Days 4 Lines in 2020, a comprehensive assessment of Montreal's 68 metro stations to analyze the accessibility of the city's public transit system. He discovered that 76% of stations lack elevators in at least one of their entrances, creating service access difficulties for those with disabilities, the elderly, and parents with young children. The Mayor of Montreal is introducing 41 elevator-equipped metro stations by 2025 to address this issue.26 Although inadequate public transportation infrastructure is a serious concern, it is also critical to have trained agents to assist persons with disabilities, such as helping the visually impaired navigate stations. Ensuring that all individuals have access to a safe public transportation system is the foundation for establishing a CFCC and minimizing the reliance on cars.

Urban Sprawl and Car Dependency Montreal has been facing a dramatic increase in urban sprawl over the last 25 years. Urban sprawl “is characterized by low-density residential housing, single-use zoning, and increased reliance on the private automobile for transportation.”27 Greater Montreal has been losing over 7,000 inhabitants per year to the North and South coastlines since 2015,28 mainly due to lower property prices in the suburbs. Increasing urban sprawl is a major source of concern for city planners since a lower-density city presents various infrastructural challenges, such as growing commutes to the city center, fewer public transit options, and a greater reliance on cars.

According to the Observatoire Grand Montréal, in 2020, approximately 100,000 commuters from the outer reaches of the Montreal Metropolitan Community (MMC)—a network of 82 towns spanning more than 4,360 km2—will commute by car to the city center every day, with roughly 94 percent relying on cars as their primary source of mobility. This increase in the number of daily long-distance vehicle commuters is a critical factor in the growth of Quebec's greenhouse gas emissions since 2013. Minimizing car dependency necessitates reducing parking options, restricting car use, and implementing a public transit system that connects all city areas across 24

Sustainable Mobility Policy – 2030. (2019). Gouv.qc.ca Gouvernement du Québec, ministère des Transports. (2019). Urban Public Transit Intervention Framework 26 Wagner, L. (2021, April 2). The Montreal Metro on the Way to Universal Accessibility. Inclusive City Maker 27 Rafferty, J. P. (2019). urban sprawl | Description, Causes, Environmental Impacts, & Alternatives 28 Urban sprawl continuing across Greater Montreal: CMM. (2020, January 7). Montreal

25

Implementing a Car-Free City Centre and Developing New Bike Lanes in Montreal

the greater metropolitan area; unfortunately, the implementation of these programs are unlikely if a city's working population is primarily located in the suburbs. The city must be able to restrict automobiles by designing a specific area free of cars, similar to Oslo. In terms of parking, the city must seek to extend transit outside the car-free zone's boundaries, ensuring that those arriving from the suburbs have sufficient transportation options to get to the city center. Montreal should encourage a multi-modal system that guarantees people choose the most appropriate mode of transportation for each trip and cars are only used when necessary.

Business Stakeholders Transitioning from a car-centric city to a pedestrian-centric city requires a shift in individual habits and behavior, making public opinion a pivotal factor in the policy. The Car-Free Liveability Programme (CFLP) and Action Programme raised substantial concerns among business stakeholders, the principal opponents of the new emergent concept of CFCC.29 The primary concern voiced when the project initially launched in Bilfritt Byliv was a lack of information on the project's objectives and measures, leaving the public to rely on newspapers for updates. A survey conducted in Oslo in 2018 found that more than half of companies were opposed to the CFLP due to a widespread assumption that restricting car access would negatively impact commercial activity, a fear previously proven unfounded. There were also concerns about the delay in deploying the 'city accounting' tool to measure the city's economic impact, and thus the delay in assessing the project's impact in its early phases.30 The Oslo CFCC project's design and management, rather than the objective of decreasing automobile use and encouraging active transportation, have been the major targets of criticism.

If Montreal were to implement a similar program, the city should carefully design an effective communication strategy that highlights the project's objectives and practicalities. The city should emphasize the project's economic and social benefits and highlight the economic welfare to be gained from such a policy. While generalizations are unavoidable in policymaking, city planners must consider stakeholders and adopt proposals suitable for all needs, such as granting special automobile access to business owners for deliveries.

29 30

See Appendix A. Wylie, J. (2020). Open for business? Making car-free city centres work for everyone. POLIS Network

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V Conclusion: Recommendations for Montréal Scenario 1: Cost-Benefit analysis reveals that external benefits are greater than external costs Montreal would need to actively pursue the implementation of a CFCC. By considering the impacted social groups (summarized in Appendix C) and the solutions that can be provided to ensure the efficient outcomes mentioned in Part III, the municipality should aim to achieve the socially optimal outcome through the following recommendations: communicating with residents and the business stakeholders; creating and improving efficient public transportation; establishing a delimitation scheme for a CFCC, ideally in the downtown area; gradually banning cars; creating bike lanes and greener spaces; installing a tool or department that oversees the evaluation of the impacts of the policy; assuring continuous communication with impacted groups to measure satisfaction.

Scenario 2: Cost-Benefit analysis reveals that external benefits are less than external costs This scenario would imply that implementing a CFCC is not beneficial for Montreal due to greater costs compared to benefits; however, it does not insinuate the complete rejection of this proposal. Rather, it underlines that Montreal, at the present moment, does not need to resort to such measures to achieve its socially optimal point. Moreover, it does not condemn the potential that the municipality might create a CFCC in the future as environmental concerns continue to grow and society is required to adapt.

VI Appendices Appendix A

Implementing a Car-Free City Centre and Developing New Bike Lanes in Montreal

Appendix B

Appendix C

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VII References Celis-Morales, C. A., Lyall, D. M., Welsh, P., Anderson, J., Steell, L., Guo, Y., Maldonado, R., Mackay, D. F., Pell, J. P., Sattar, N., & Gill, J. M. R. (2017). Association between active commuting and incident cardiovascular disease, cancer, and mortality: prospective cohort study. BMJ, j1456. https://doi.org/10.1136/bmj.j1456 Common Questions - Official Market Street Improvement Initiative - City and County of San Francisco. (n.d.). Www.bettermarketstreetsf.org. http://www.bettermarketstreetsf.org/about-common-questions.html Globe editorial: Canada’s cities are about to add millions of new residents. They can’t all drive to work. (2020). The Globe and Mail. https://www.theglobeandmail.com/opinion/editorials/article-canadas-cities-are-about-to-a dd-millions-of-new-residents-they-cant/ Gouvernement du Québec, ministère des Transports. (2019). Urban Public Transit Intervention Framework. https://www.transports.gouv.qc.ca/en/Documents/urban-transit-intervention-framework.p df Gu, J., Mohit, B., & Muennig, P. A. (2016). The cost-effectiveness of bike lanes in New York City. Injury Prevention, 23(4), 239–243. https://doi.org/10.1136/injuryprev-2016-042057 L'Observatoire Grand Montréal. (2020). Le phénomène de l’urbanisation péri métropolitaine en progression au pourtour du Grand Montréal. http://observatoire.cmm.qc.ca/fileadmin/user_upload/documents/2020_01_Note_observat oire.pdf Matthews, H. (2021). Montreal’s emissions targets for 1.5°C and 2°C global warming. https://ocpm.qc.ca/sites/ocpm.qc.ca/files/pdf/P80/7.2.19_damon_matthews.pdf Montreal Air Quality Index (AQI) and Canada Air Pollution | AirVisual. (2021). Www.iqair.com. https://www.iqair.com/ca/canada/quebec/montreal Montreal Population 2021 – Canada Population. (2021). Canadapopulation.org. https://canadapopulation.org/montreal-population/ Montréal, V. de. (2020). Montréal Climate Plan: Objective carbon-neutral by 2050. Montreal.ca. https://montreal.ca/en/articles/montreal-climate-plan-objective-carbon-neutral-2050-7613

Implementing a Car-Free City Centre and Developing New Bike Lanes in Montreal

Neill, P. (2020, May 6). Could car-free cities be here to stay? AirQualityNews. https://airqualitynews.com/2020/05/06/could-car-free-cities-be-here-to-stay/ Nieuwenhuijsen, M. J., & Khreis, H. (2016). Car free cities: Pathway to healthy urban living.

Environment International, 94, 251–262. https://doi.org/10.1016/j.envint.2016.05.032 Rafferty, J. P. (2019). urban sprawl | Description, Causes, Environmental Impacts, & Alternatives. In Encyclopædia Britannica. https://www.britannica.com/topic/urban-sprawl Sustainable Mobility Policy – 2030. (2019). Gouv.qc.ca. https://www.transports.gouv.qc.ca/en/Pages/sustainable-mobility-policy.aspx Tarride, J.-E., Lim, M., DesMeules, M., Luo, W., Burke, N., O’Reilly, D., Bowen, J., & Goeree, R. (2009). A review of the cost of cardiovascular disease. The Canadian Journal Cardiology25(6), e195-202. https://doi.org/10.1016/s0828-282x(09)70098-4 The City Wellbeing Index: How happy are the world’s leading cities? (2020).

Www.knightfrank.com. https://www.knightfrank.com/wealthreport/cities/2020-03-03-the-city-wellbeing-index-ho w-happy-are-the-worlds-leading-cities The economic benefits of car-free streets . (2019). Copenhagenize Design Co. https://copenhagenize.eu/news-archive/2019/3/14/the-benefits-of-car-free-streets Topp, H., & Pharoah, T. (1994). Car-free city centres. Transportation, 21(3), 231–247. https://doi.org/10.1007/bf01099212 Urban sprawl continuing across Greater Montreal: CMM. (2020, January 7). Montreal. https://montreal.ctvnews.ca/urban-sprawl-continuing-across-greater-montreal-cmm-1.475 6132 Wagner, L. (2021, April 2). The Montreal Metro on the Way to Universal Accessibility. Inclusive City Maker. https://www.inclusivecitymaker.com/montreal-metro-universal-accessibility/

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World Health Organization. (2021). How air pollution is destroying our health. Www.who.int. https://www.who.int/news-room/spotlight/how-air-pollution-is-destroying-our-health

Wylie, J. (2020). Open for business? Making car-free city centres work for everyone. POLIS Network. https://www.polisnetwork.eu/article/open-for-business-making-car-free-city-centres-work -for-everyone/

Financial Crashes and Recessions: The Debt-De ation Route

By Rohaim Khan Written for ECON 461: Honours History of Economic Thought II Edited by Kaifuzzaman Khan, Tahsin Kabir Etul, and Declan Forde

I Introduction The Great Depression of the 1930s remains one of the largest and most severe economic recessions in history. Its impacts were felt around the globe and inspired a plethora of research and study to determine its causes, with different schools of thought highlighting their own explanations for the severity of this event. This paper examines the development of one such explanation, the Debt-Deflation Theory, and its applicability to understanding the financial factors behind a recession. The theory’s movement through the 20th century is explored with a close look at the work of three influential economists—Irving Fisher, Hyman Minsky and Ben Bernanke.

II Irving Fisher The first major discussion of this theory was by Irving Fisher in his 1933 paper The Debt-Deflation Theory of Great Depressions. Fisher has been described as “the greatest economist the United States has ever produced”1; unfortunately, at the onset of the Wall Street Crash of 1929, Fisher’s reputation took a damaging hit after his claim that the stock market reached “a permanently high plateau” was proven wrong when the Dow Jones plummeted by 13% 8 days later.2 According to Fisher, there are two main factors to explain depressions followed by great booms—“over-indebtedness to start with and deflation following soon after.”3 A brief summary of his nine-link mechanism emphasizing this sequence of disturbances is as follows: a situation of debt liquidation would lead to distress selling to pay off bank loans, reducing the size of bank deposits and velocity of money circulation. This results in a fall in the price level and net worth, accompanied by bankruptcies and lower profits, forcing cuts in output and employment. There is a subsequent loss of confidence in the economy and money hoarding, which further slows down

1

Schumpeter, Joseph (1951) Ten Great Economists from Marx to Keynes.

Fisher, Irving (1929) “FISHER SEES STOCKS PERMANENTLY HIGH,” The New York Times, Oct 16, 1929: 8 3 Fisher, Irving (1933) “The Debt-Deflation Theory of Great Depressions”: 340 2

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the velocity of circulation and ends with the nominal interest rate falling and the real interest rate rising.4 Fisher, in describing this mechanism, was challenging the mainstream classical economics theory of monetary neutrality. Deflation, or the reduction in the price of money, raises the real burden of nominal debt, which causes real economic effects as outlined above. In fact, this theory of booms and depressions was also markedly different from prior theories, due to its explicitly non-equilibrium nature. Fisher writes that “it is as absurd to assume that...the variables in the economic organization will ‘stay put,’ in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave”.5 Another feature of this theory to note is the distinction made between the price of assets and the price of goods; it is large declines in the former that leads to an extended economic contraction, owing to lower net worth, reducing consumption demand. A falling absolute price level is not a necessary condition for debt deflation, but it does exacerbate the problem of reduced demand and output.

The American public was in a position of great indebtedness at the onset of the Great Depression. During the 1920’s bull market, investors had been financing their equities heavily with debt by obtaining margin loans from their brokers, and prior to 1933, the New York Stock Exchange imposed no requirements for these margin levels. The banking and finance sector saw “new opportunities to invest at a big prospective profit” which drove investment.6 In the post-war period leading up to the crash, as little as 10% of the stock price could be put up by investors, with the rest financed by the broker.7 This was also shortly after con artist Charles Ponzi gained notoriety across North America for running fraudulent money-making programs out of Boston.

Thus, in such an environment, it is not hard to see how people were constantly drawn to the prospects of making money easily and quickly.

Had the investments been made with mostly equity, the effects would not have been so pronounced and severe as they were. Fisher writes that “over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money”.8 This is ironic considering that Fisher himself borrowed a significant sum of money from his wife and sister-in-law to invest in the 1920s bull market, promptly losing between $8-10 million in the crash of 1929 and the years following.

4

Fisher (1933): 342 Fisher (1933): 339 6 Fisher (1933): 348 7 Rappoport, Peter, and Eugene N. White (1994) “Was the Crash of 1929 Expected?”: 272 8 Fisher (1933): 341 5

Financial Crashes and Recessions: The Debt-De ation Route

The Fisher version of Debt-Deflation theory was not, then, a fully complete and consistent theory. It did not clarify why a transfer of wealth from debtors to creditors would have macroeconomic consequences, nor did it provide an explanation for how the initial credit bubbles that precede debt deflation are formed. These points are addressed later in the paper.

Nevertheless, Fisher’s 1933 paper was extremely important for shaping how macroeconomics thought about financial crashes leading into recessions and understood how some crashes lead to depressions while others did not.

There has been renewed interest in his work following the 2008 recession and the 2020 pandemic, however, when it was published, Fisher’s debt-deflation theory failed to gain much traction in the economic world. Even Keynes, who respected Fisher and admired his work on the quantity theory of money, failed to mention Fisher’s debt-deflation theory in any of his writings.

It was not until almost 40 years later that Irving Fisher’s theory resurfaced in the work of Hyman Minsky and his financial instability hypothesis.

III Hyman Minsky Hyman Minsky was a well-reputed scholar who considered himself a Keynesian but disagreed with many of the mainstream interpretations of Keynes that economists had come to adopt. He published his influential reinterpretation of Keynesian theory, John Maynard Keynes, in 1975; in this book, Minsky attempts to incorporate Fisher’s approach in his model of endogenous instability of financial institutions and the financial sector in a capitalist economy.

Minsky argued that crises are integral to financial markets. He notes in his preface that “as recovery approaches full employment … soothsayers will proclaim that the business cycle has been banished [and] debts can be taken on … But in truth neither the boom, nor the debt deflation … and certainly not a recovery can go on forever. Each state nurtures forces that lead to its own destruction.”9 Minsky, like Fisher, argued against the idea of macroeconomics’ fundamentally stable equilibrium models that are only affected by external shocks; as part of his financial instability hypothesis, Minsky believed a capitalist system would internally generate business cycle shocks itself.10 Building upon the discussion of financial innovations, Minsky was quite explicit about the role of financial institutions in crashes: “the extent to which … leveraging … takes place in the financing of investment depends not only on the expectations of investing firms but also on the willingness of bankers to go along with, if not to urge, such layering.”11 To 9

Minsky, Hyman P. (1975) John Maynard Keynes. Columbia University Press: 175 Minsky, Hyman P. (1992) The Financial Instability Hypothesis. The Jerome Levy Economics Institute Working Paper No. 74.

11 Minsky (1975): 115 10

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Minsky, the financial sector was not merely an intermediary transferring money between agents, rather, its units were profit-seeking institutions that were key mechanisms for its endogenous instability. He notes that those who study Keynes too analytically and lack exposure to Wall Street fail to see that “finance sets the pace for the economy.”12 Minsky’s theory has 3 distinct stages.13 Long periods of continuing success in investment gains encouraged a diminished view of the risk present in markets, leading to increased leveraging and borrowing of money to invest. This is the Speculative Stage, where generally only interest obligations are met. The debt-leveraged investors are now vulnerable, and a cash crisis may begin with a moderate decline in asset prices. There is then a large sell-off by borrowers to meet their obligations, which increases margin calls and leads to a downward spiral in asset prices. This culminates in a sharp decline in liquidity in the market as well as cash-constrained agents in the economy, where we reach the Ponzi stage. Minsky states that once the decline in share prices is set off, Fisher’s debt-deflation process begins followed by a period of low income and high unemployment.14 Thus begins the recovery and expansion stage in this process: the Hedge stage.

Here, financial positions are initially built with more care and prudence, with ability to meet principal and interest obligations; but “success breeds daring, and over time the memory of the past disaster is eroded” and the economy finds itself in a boom again.15 During a period of boom, there is a shift towards speculative and Ponzi finance, while the safety of hedge finance is favored during times of trouble.

By providing an explanation for the initiation of a Fisherian debt-deflation process and incorporating this with Keynesian theories of investment, Hyman Minsky contributed immensely to the understanding of financial crashes. Going against the post-World War II trend in macroeconomics of excessive mathematical models, Minsky adopted a more narrative approach to his work. Dealing with central concepts such as uncertainty and exuberance, this allowed him to present a more realistic view of the economy—a similar methodology to prominent economists before him like Keynes, Fisher and Hayek. Minsky’s cycle theory of the repeated slow movement of the financial system from stability to fragility to crisis has been dubbed the ‘Minsky Moment’ and is one of the most well-known aspects of his academic work. At a fundamental level, the simple tenet underlying Minsky’s influential theory is quite powerful on its own: stability is destabilizing. However, like Fisher, his work was not fully appreciated until the 2008 financial crisis.

12

Minsky (1975): 127 Minsky, Hyman P. (1982) Can “it” Happen Again?: Essays on Instability and Finance.

14 Minsky (1975): 123 15 Minsky (1975): 125 13

Financial Crashes and Recessions: The Debt-De ation Route

IV Ben Bernanke Ben Bernanke is one of the most well-known modern macroeconomists, having served as chairman of the US Federal Reserve for 8 years and during the 2008 financial crisis. Bernanke’s 1983 paper on the Great Depression provided a key perspective on the event. Focusing on the banking system, he writes that “because markets for financial claims are incomplete, intermediation between some classes of borrowers and lenders requires nontrivial market-making and information-gathering services. The disruptions of 1930-33 reduced the effectiveness of the financial sector as a whole in performing these services. As the real costs of intermediation increased, some borrowers …found credit to be expensive and difficult to obtain. The effects of this credit squeeze on aggregate demand helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression.”16 Information asymmetries in the financial markets mean that banks have a special role to play in the credit system, such as screening good borrowers from bad and other services, all of which create a cost of credit intermediation (CCI).

The bank runs and loss of confidence in the 1930s led to a rise in the CCI, thereby contracting the role of the banking system and reducing activity. In other words, financial distress impairs the process of credit intermediation, and a credit contraction, in turn, depresses consumption demand and aggregate output.

Deflation plays an important role in Bernanke’s system, particularly due to its effect on increasing the real burden of debt among insolvent debtors. This resulted in a further increase in CCI because the CCI measurement included “the expected losses inflicted by bad borrowers.”17 In words reminiscent of Fisher, Bernanke remarks that “the seriousness of the problem in the Great Depression was due not only to the extent of the deflation, but also to the large and broad-based expansion of inside debt in the 1920s.”18 Lower borrower net worth also added significance because of how it reduced lending and economic activity: “a lower amount of a borrower's net worth increases the agency problem because the borrower has less to lose by engaging in moral hazard.”19 A crucial policy implication of Bernanke’s work is the fundamental role of the Federal Reserve in preventing a debt-deflation recession. The Fed’s failure to act as a lender of last resort during the Great Depression worked against the American economy’s best interests. Knowing that lenders are central to the process of financial intermediation, their inability to provide loans due to higher CCI and bankruptcies led to the collapse of the banking system.

16

Bernanke, Ben. (1983) “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression”: 258 17 Bernanke (1983): 263 18 Bernanke (1983): 261 19 Bernanke, Ben S., and Mark Gertler (1989) “Agency Costs, Net Worth, and Business Fluctuations”: 14-31

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V Other Developments Bernanke’s work inspired a succession of literature on the role of imperfect credit allocations under asymmetric information for financial distress. Charles Calomiris writes that “access to external finance may be inhibited because of information costs faced by sources of outside funding,”20 essentially an increase in the CCI. More recently, Gertler and Gilchrist argue in a similar vein that an “elevated external finance premium is a common feature of financial crises.”

21 They relate the external finance premium with borrower balance sheets, outlining how this leads to interconnectedness between the financial sector and real activity. Weaker balance sheets (or net worth) lead to higher premiums and, thus, reduce spending and activity, which further weakens net worth, and so on. This feedback loop has been covered extensively in contemporary models but Fisher’s debt-deflation theory, which “held that the weakening of borrower balance sheets [stemmed] from the sharp price deflation” is recognized as an important starting point.22 For a more recent perspective on Debt-Deflation Theory, Mian and Sufi and their work on credit-driven household demand in financial cycles provide historical support for the working of Fisher’s theory. They cite an example of the isolated effect of an increased debt burden, based on a Hungarian study, which sharply decreased household spending.23 Mian and Sufi also address another feature that was missing explicit mention in Fisher’s original model that can help explain why a transfer of wealth from debtors has macroeconomic effects: that “higher marginal propensity to consume among debtors...explains the severity of recessions.”24

VI Conclusion There is no shortage of economists that could have been linked to the development of this theory, nor is this the sole explanation for the Great Depression. The work of Keynes (who influenced Minsky) and Friedman and Schwartz’s monetary explanation of the recession (who influenced Bernanke) merit their own papers. However, the Debt-Deflation explanation was chosen to highlight a theory that has long been pushed to the margins of mainstream economics. Fisher and Minsky, in particular, did not receive the attention of economists for a large part of history, but there has been a gradual return to more serious consideration of these ideas, especially for policy decisions during times of crisis.

20

Calomiris, Charles W. (1993) “Financial Factors in the Great Depression”: 67 Gertler, Mark, and Simon Gilchrist (2018) “What Happened: Financial Factors in the Great Recession”: 5 22 Gertler, Gilchrist (2018): 6 23 Mian, Atif, and Amir Sufi (2018) "Finance and Business Cycles: The Credit-Driven Household Demand Channel”: 43 24 Mian, Sufi (2018): 43 21

Financial Crashes and Recessions: The Debt-De ation Route

This paper demonstrates that rather than determining which of the competing theories is the most accurate explanation, it is more important to understand that the alternative insights each theory provides hold value when diagnosing a crisis. It is fitting to end this thought with an excerpt from the final page of Keynes’ General Theory: “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

VII References Bernanke, Ben S. (1983) “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” The American Economic Review, 73(3): 257-276.

Bernanke, Ben S., and Mark Gertler (1989) “Agency Costs, Net Worth, and Business Fluctuations,” The American Economic Review, 79(1): 14-31.

Calomiris, Charles W. (1993) "Financial Factors in the Great Depression," Journal of Economic Perspectives, 7(2): 61-85.

Fisher, Irving (1929) “FISHER SEES STOCKS PERMANENTLY HIGH,” The New York Times, Oct 16, 1929: 8.

Fisher, Irving (1933) “The Debt-Deflation Theory of Great Depressions,” Econometrica, 1(4): 337-57.

Gertler, Mark, and Simon Gilchrist (2018) "What Happened: Financial Factors in the Great Recession," Journal of Economic Perspectives, 32(3): 3-30.

Keynes, J.M. (1936) The General Theory of Employment, Interest and Money. New York: Harcourt, Brace.

Mian, Atif, and Amir Sufi (2018) "Finance and Business Cycles: The Credit-Driven Household Demand Channel," Journal of Economic Perspectives, 32(3): 31-58.

Minsky, Hyman P. (1975) John Maynard Keynes. Columbia University Press.

Minsky, Hyman P. (1982) Can “it” Happen Again?: Essays on Instability and Finance. Armonk,

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N.Y.: M.E. Sharpe.

Minsky, Hyman P. (1992) The Financial Instability Hypothesis. The Jerome Levy Economics Institute Working Paper No. 74.

Rappoport, Peter, and Eugene N. White (1994) “Was the Crash of 1929 Expected?,” The American Economic Review, 84(1): 271-281.

Schumpeter, Joseph (1951) Ten Great Economists from Marx to Keynes. New York: Oxford University Press.

The Problem On Our Plates: Evaluating the Carbon Abatement E ects of an Excise Tax on Beef in the United States Retail Market

By Josh Holtzman, Brian Kehoe, and Jack Kline Written for ECON 408: Public Sector Economics I Edited by Caleb Sansom, Nada Abdelhamid, and Ava Liang

Abstract The beef industry is one of the largest contributing sectors to greenhouse gas emissions, making it a significant contributor to climate change. This paper evaluates the efficacy of an excise tax on beef products as a means to reduce negative externalities and eliminate the social implications of such a tax. This paper argues that while an excise tax would theoretically curb beef consumption to the desired level, a comprehensive approach that includes subsidizing alternative food sources and non-price strategies (like nudging) might better reduce the burden on consumers, while reducing externalities.

Keywords: Greenhouse Gas Emissions, Beef, Negative Externality, Excise Tax, Marginal Social Cost, Marginal Social Benefit, Marginal Private Cost, Deadweight Loss, Subsidy, Carbox Tax, Nudging.

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I Introduction Mass beef consumption has a detrimental effect on society, specifically with regards to climate change. In fact, one of the often disregarded factors contributing to the ecological destruction of our planet sits on our plates: the food industry. The food industry is responsible for over a quarter of greenhouse gas emissions,1 and beef production is roughly eight times more emissions-intensive than chicken and six times more emissions-intensive than pork.2 The magnitude of this difference is showcased in the following graphic from Our World in Data derived from Poore and Nemecek’s 2018 research:

Figure 1: Greenhouse gas emissions per 100g of protein generated by various protein sources Americans, in particular, consume a disproportionate share of the world’s beef products. Despite only making up 4% of the global population,3 the United States accounts for over 20% of the world’s beef consumption and 20% of the world’s overall beef production.4 Accordingly, it is futile to seek to course-correct GHG emissions without meaningfully addressing diet. Reducing food-related GHG emissions has to become a critical component of policies in order to mitigate climate change.5 Human-induced greenhouse gas emissions are often thought of in terms of car 1

Marco Springmann et al., “Mitigation potential and global health impacts from emissions pricing of food commodities,” The Lancet 387 (May 2016): 1937-1943, 2.

2 Laura Wellesley et al., Changing Climate, Changing Diets: Pathways to Lower Meat Consumption, (London: Chatham House, 2015), 1.

3 US Census Bureau, “US and World Population Clock,” Accessed December 9, 2021.

4 Rob Cook, “World Beef Consumption: Ranking of Countries (USDA),” Beef2Live, December 7, 2021.

5 Springmann et al., 1.

The Problem On Our Plates: Evaluating the Carbon Abatement E ects of an Excise Tax on Beef in the United States Retail Market

exhaust or chemical plant fumes and human ingestion is rarely considered, although it is the other side of the coin.

The adverse effects of climate change and humankind’s role in exacerbating them are well established. If global temperatures continue rising at their current pace, the world will experience poverty and displacement, increased droughts, food instability, severe storms, and increases in tropical diseases like malaria.6 Given that the global emissions problem can be improved by altering diet, the outstanding question revolves around the mechanism by which to do so in a manner that realigns incentives and avoids coercion. Economists understand that price plays the ultimate role in influencing consumer behavior, and that governments can alter prices towards a desirable outcome through taxation.

This paper examines the implementation of an excise tax on beef consumption, complete with a graphical analysis and a policy-oriented examination of the societal impact of this tax. That being said, certain consequences pertaining to the implementation of the tax forces the examination of alternative strategies to combat the negative externalities brought on by beef consumption, which merits its own discussion as well. In sum, it will become clear that a holistic approach is best served to achieve the socially optimal outcome, combining the strong economic force of an excise tax with other programs designed to mitigate its flaws in order to maximize welfare in society.

II Analysis Levying an excise tax on beef products could be an effective tool for fostering behavioral shifts.7 The intention behind this tax would be to correct the negative externalities created by beef production by raising the price of beef, and thereby discouraging consumption. The effect of this tax on the competitive retail grocery market is modeled below in Figure 2,8 which considers the possibility that consumer demand for beef is inelastic due to cultural preferences. This alters the framework such that the burden of a potential tax falls heavily on the consumer, while the quantity demanded only changes slightly. We model this possibility in Figure 3, but assume that the price elasticity of demand for beef is conventionally normal based on findings that place the elasticity of beef in the US between 1.003 and 1.166 with 95% confidence.9 6

UN News, “Climate change link to displacement of most vulnerable is clear: UNHCR,” April 22, 2021.

Wellesley et al., 9.

8 Darshan Kalyani, “Supermarkets and Grocery Stores in the US,” IBISWorld Industry Report 44511, (Los Angeles: IBISWorld, 2019), 2.

7

9

Craig, Gallet, "A Meta-Analysis of the Price Elasticity of Meat: Evidence of Regional Differences" Business and Economic Research vol. 2, no. 2, (2012): 23.

48

As shown above, the market is currently operating at a social disequilibrium. At (Q1, P1), marginal social cost (the cost to society of one additional unit of beef production) exceeds marginal private cost (the cost to the individual of one additional unit of beef production), indicating a negative externality. The imposition of an excise tax of the value P2-P0 would induce a rise in the price of beef from P1 to P2 and a fall in the quantity demanded of beef from Q1 to Q2, generating consumer and producer tax burdens, labeled CB and PB respectively. The deadweight loss generated by the externality, represented by the orange triangle, would be eliminated by a shift in the marginal private cost curve to equal the marginal social cost curve. At (Q2, P2), the cost to an individual of purchasing beef incorporates the external costs imposed on society.

III Discussion Assessing an Excise Tax on Beef This paper focuses on taxing beef consumption for several reasons. First, taxing beef consumption is adequately targeted. Since beef consumption accounts for the largest share of greenhouse gas emissions, it is an appropriate starting point for government intervention.10 Second, a tax on beef consumption is easily implementable and, according to Wirsenius et al., is associated with low administrative costs. Third, the literature suggests that the aforementioned tax is highly effective. The analysis of a tax scheme on meat consumption at large finds that a tax 10

Stefan Wirsenius et al. “Greenhouse gas taxes on animal food products: rationale, tax scheme and climate mitigation effects.” Climate Change 108 (2011): 159-184.

The Problem On Our Plates: Evaluating the Carbon Abatement E ects of an Excise Tax on Beef in the United States Retail Market

on beef alone leads to an emissions reduction of 80% for the broader tax scheme considered.11 Finally, Americans consume a disproportionately large amount of beef, so a policy that curbs American consumption will have a significant impact. For these reasons, it is appropriate to begin taxing beef consumption to alter the trajectory of consumer behaviour and mitigate emissions.

This analysis and policy recommendation rely on several assumptions, the first being a competitive retail market for beef. This assumption is justified based on a 2019 IBISWorld market research report on the American supermarket industry. The report finds that 68% of market share is held only by companies with less than a 4% market share, signifying a broad base of small competitors in the industry .12 The competition is also high, with little product differentiation across stores and a high degree of substitutability between similar products.13 While the existence of market frictions precludes perfect competition in reality, a perfectly competitive framework captures the essence of the market structure for supermarkets, making it a suitable approximation.

There are various tools available to policymakers to disincentivize beef consumption. An excise tax, analyzed in detail above, is likely the most effective in fostering behavioral shifts.14 However, an increase in the price of beef is likely to be poorly received. While 23% of Americans report eating less meat in general over the past year, according to a 2020 Gallup poll15 beef sales rose by 23.7% in the same period.16 The rise in the price of beef products (particularly ground beef) would also have disproportionately negative welfare effects on lower-income individuals.17 Public acceptance of the tax is likely to be low unless measures are taken to mitigate the consequences.

A popular mitigation strategy known as “ring-fencing” uses revenue generated from these taxes to fund the production of and access to alternatives.18 In light of the concerns regarding societal acceptance and consequences to low-income constituents, alternative approaches to changing consumption in lieu of or in conjunction with an excise tax are worthy of consideration.

11

Wirsenius, 163.

Kalyani, 26.

13 Kalyani, 23.

14 Wellesley et al., 9.

15 Justin McCarthy and Scott DeKoster, “Nearly One in Four in U.S. Have Cut Back on Eating Meat,” Gallup News, January 27, 2020.

16 Kate Taylor, “Americans’ red meat obsession is growing stronger, with beef sales skyrocketing to $30 billion as a ‘meat war’ looms,” Business Insider, May 3, 2021.

17 Alison Grant et al, “Economic and Nutritional Effects of a Meat Tax: Results from a Basket-Based Choice Experiment,” Working Paper presented at the Department of Food, Agricultural and Resource Economics (FARE), University of Guelph. February 23, 2020, 4.

18 Wellesley et al, 15.

12

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Alternative Approach: Carbon Tax Another possibility is to alter the form of taxation while maintaining the same stated aim. In this vein, the UK Health Alliance on Climate Change released a report maintaining that fiscal incentives for reducing beef consumption should hone in on CO2 emissions and specifically target the production process. Accordingly, they recommend implementing a carbon tax on all food producers based on their carbon footprint.19 A levy of this kind would capture much of the same effects of an excise tax on beef, since beef production is highly carbon-intensive. As shown in Figure 4, beef production is the crux of the emissions problem, but there are other culprits as well.

Figure 4: The production of beef far outweighs the environmental impact of any other meat or dairy product.

In this model, the price increases represent the maximum price impact when carbon is taxed at $247.83 per ton, according to a New York Times analysis from 2018.20 While the carbon tax mechanism represents a direct approach to taxing the environmental impact of beef, it is possible for producers to shift the tax burden onto consumers instead of innovating to reduce their climate impact, thereby harming low-income groups disproportionately.21 Therefore, this could cause a complex, harder-to-implement tax scheme beset with similar issues to those surrounding an excise tax on beef consumption. While somewhat punitive, excise taxes have been shown to alter consumer behaviour (examples include the Soft Drinks Industry Levy and minimum unit pricing for alcohol).22 In order to act swiftly and effectively, the most reasonable starting point to disincentivize beef consumption fiscally is an excise tax.

19

UK Health Alliance on Climate Change, All-consuming: Building a Healthier Food System for People and Planet, (London: UKHACC, 2020), 12.

20 Richard Conniff, “The Case for a Carbon Tax on Beef,” Opinion, New York Times, March 17, 2018.

21 UK Health Alliance on Climate Change, 12.

22 UK Health Alliance on Climate Change, 12.

The Problem On Our Plates: Evaluating the Carbon Abatement E ects of an Excise Tax on Beef in the United States Retail Market

Alternative Approaches: Subsidies and Non-price strategies Rather than implementing a tax, a similar effect on prices could be reached by removing subsidies. Currently, the meat industry in the U.S. receives $38 billion USD in annual subsidies to maintain low prices. Without this support, the price of a Big Mac would rise from $5 to $13, and a pound of hamburger would cost $30.23 Fruit and vegetable producers receive only 0.04% of the generous subsidies offered to the meat industry. Shifting subsidies away from meat and towards alternative food sources may have the same consumption-reducing effect as taxation, while facilitating access to healthy, sustainable food sources.24 Strategies to curb meat consumption that do not affect prices can also be employed. One of the main obstacles to reducing meat consumption is a lack of public awareness of the link between beef consumption and climate change.25 Informational campaigns (from the government or private organizations) are a useful first step in influencing people to eat less meat. The government could also impose regulations, like labels that require a disclosure about the harmful environmental effects of meat, or prohibiting certain advertising techniques. Though the efficacy of such policies without complementary measures is unclear, consumers can be nudged away from beef by preferential placement of alternatives on retail aisles or menus.26 One study found that nudging restaurant-goers towards a vegetarian “dish of the day” resulted in the patrons choosing the dish 85% of the time as opposed to 9% of the time in the control group.27 Further, in retail scenarios, placing plant-based meat alternatives next to their real-meat counterparts increased sales of the alternatives.28

23

Indira Joshi et al, Saving the Planet: The Market for Sustainable Meat Alternatives, (Berkeley: Sutardja Center for Entrepreneurship & Technology, 2015), 8.

24 Wellesley, 15.

25 Wellesley, 1.

26 Lindsay Smith Taillie et al., “Testing front-of-package warnings to discourage red meat consumption: a randomized experiment with US meat consumers,” International Journal of Behavioral Nutrition and Physical Activity 18 (2021): 114.

27 Frederico J.A. Perez-Cueto, “Nudging plant based meals through the menu,” International Journal of Gastronomy and Food Science 24 (2021): 12.

28 Jolien Vandenbroele et al., “Mock meat in the butchery: Nudging consumers toward meat substitutes,” Organizational Behavior and Human Decision Processes 163 (2019): 9-10.

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IV Conclusion This paper outlines the challenge humanity faces regarding the need to curb its meat consumption. The economic literature confirms in a broad sense that the best way to limit meat consumption at a societal level is to manipulate price mechanisms. There is some expected disagreement over how to do so, but a natural starting point for reducing the amount of meat consumed in the United States is an excise tax. This analysis shows that doing so brings society closer to the socially optimal level of consumption such that negative externalities are eliminated by fostering a change in behaviour.

Of course, there are unintended consequences associated with taxation, especially considering that beef is a household item in the United States, relied upon by millions of Americans on a regular basis. This paper examined several alternative approaches to account for this reality, among them, a carbon tax. While taxing production over consumption may seem appealing, a carbon tax is harder to implement, and there is no guarantee that producers will innovate to reduce their environmental footprint. As such, an excise tax is favourable when combined with complementary measures to reduce the impact of the unintended consequences. These strategies might include retargeting subsidies away from meat and other non-price-related approaches like ethical labelling and restrictions on advertising.

There are several points to consider for future research, given the contents of this paper. First, it is important to recognize that in order to be precise and intellectually honest, this analysis only considered the American market and UK research on a potential carbon tax. While it is reasonable to use the American market as an imperfect proxy for the Canadian and UK markets, given the inherent socio-cultural similarities, it is inappropriate to do so for most other countries, and further research is required to determine appropriate solutions for other states. This is to say that though this analysis sought to understand this problem through an economic lens, the issue is also one of culture. For example, several economies do not share this problem because their culture does not promote eating meat. So, while the interim solution might be taxation, any long-term approach must be built on changing the underlying socio-cultural implications of meat-eating.

The Problem On Our Plates: Evaluating the Carbon Abatement E ects of an Excise Tax on Beef in the United States Retail Market

V References Conniff, Richard. “The Case for a Carbon Tax on Beef.” Opinion, New York Times. March 17, 2018. https://www.nytimes.com/2018/03/17/opinion/sunday/carbon-tax-on-beef.html.

Cook, Rob. “World Beef Consumption: Ranking of Countries (USDA).” Beef2Live. December 7, 2021. https://beef2live.com/story-world-beef-consumption-ranking-countries-164-106879.

Gallet, Craig. "A Meta-Analysis of the Price Elasticity of Meat: Evidence of Regional Differences." Business and Economic Research vol. 2, no. 2, (2012): 23.

Grant, Alision et al. “Economic and Nutritional Effects of a Meat Tax: Results from a Basket-Based Choice Experiment.” Working Paper presented at the Department of Food, Agricultural and Resource Economics (FARE), University of Guelph. February 23, 2020.

Joshi, Indira et al. Saving the Planet: The Market for Sustainable Meat Alternatives. Berkeley: Sutardja Center for Entrepreneurship & Technology, 2015.

Kalyani, Darshan. “Supermarkets and Grocery Stores in the US.” IBISWorld Industry Report 44511. Los Angeles: IBISWorld, 2019.

McCarthy, Justin, and Scott DeKoster. “Nearly One in Four in U.S. Have Cut Back on Eating Meat.” Gallup News. January 27, 2020. https://news.gallup.com/poll/282779/nearly-one-four-cut-back-eating-meat.aspx.

Perez-Cueto, Frederico J.A. “Nudging plant based meals through the menu.” International Journal of Gastronomy and Food Science 24 (2021): 100346.

Smith Taillie, Lindsay et al. “Testing front-of-package warnings to discourage red meat consumption: a randomized experiment with US meat consumers.” International Journal of Behavioral Nutrition and Physical Activity 18 (2021): 114.

Springmann, Marco et al. “Mitigation potential and global health impacts from emissions pricing of food commodities.” The Lancet 387 (May 2016): 1937-1943.

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Taylor, Kate. “Americans’ red meat obsession is growing stronger, with beef sales skyrocketing to $30 billion as a ‘meat war’ looms.” Business Insider. May 3, 2021. https://www.businessinsider.com/americans-more-beef-as-a-meat-war-looms-2021-5.

UK Health Alliance on Climate Change. All-consuming: Building a Healthier Food System For People and Planet. London: UKHACC, 2020.

UN News. “Climate change link to displacement of most vulnerable is clear: UNHCR.” April 22, 2021. https://news.un.org/en/story/2021/04/1090432.

US Census Bureau. “US and World Population Clock.” Accessed December 9, 2021. https://www.census.gov/popclock/.

Vandenbroele, Jolien et al. “Mock meat in the butchery: Nudging consumers toward meat substitutes.” Organizational Behavior and Human Decision Processes 163 (2019): 9-10.

Wellesley, Laura et al. Changing Climate, Changing Diets: Pathways to Lower Meat Consumption. London: Chatham House, 2015.

Wirsenius, Stefan et al. “Greenhouse gas taxes on animal food products: rationale, tax scheme and climate mitigation effects.” Climate Change 108 (2011): 159-184.

Understanding The E cient Market Hypothesis

By Maya Sorguc Written for ECON 460: Honours History of Economic Thought I Edited by Declan Forde, Jing Hang, and Mariel Yacolca Maguiña

I Introduction The applications of many influential economic theories developed throughout history remain highly disputed today. The Efficient Market Hypothesis (EMH) is one such theory. For years it was carefully studied, namely within financial economic circles in the 1980s. Since then, however, its empirical credibility has been put into question by subsequent studies.1 As a result, the EMH has transitioned from being a widely accepted theory championed by Eugene Fama, often known as the father of the EMH, to become very controversial in financial economics today.

II The Hypothesis Fama’s work in the field of capital market efficiency has indeed become widely known. In 1965, Fama was the first to introduce the concept of an efficient market in his work entitled “The Behavior of Stock Market Prices”, which was published in the Journal of Business.2 In his paper, he hypothesised that stock prices are entirely random, and defined the term efficient market for the first time. He claimed that the evidence for the EMH is so strong that it is very difficult to contradict it, and proposed to carry out market efficiency and asset pricing tests.3 A market is considered efficient if prices reflect all the available market information.4 In an efficient market, it is impossible to earn a return on a stock that is above the market return.5 Thus, stocks always trade at their fair value and equal future cash flow discounted by an alternative cost of capital. According to the EMH, markets always reflect fundamental information about individual stocks and the markets they are exchanged in. Therefore, the EMH argues that all

1

Degutis, A., Novickyte, L. (2014), “The Efficient Market Hypothesis: A Critical Review of Literature and Methodology”, Ekonomika, Vol. 93, Pages 7-23 2 Delcey, T. (2019), “Samuelson vs. Fama on the Efficient Market Hypothesis: The Point of View of Expertise”, Economia, Vol. 9, No. 1, Pages 37-58 3 Degutis, A., Novickyte, L. (2014) 4 Eugene, F. Fama (1970), “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance, Vol. 25, No. 2, Pages 383-417 5 Degutis, A., Novickyte, L. (2014)

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financial markets are considered efficient. Note that said markets can be efficient even if participants are irrational or if stock prices are highly volatile.6 The Efficient Market Hypothesis is best captured by the notion of a ‘random walk’. The concept of a random walk was initially used in mathematics, physics, botany, and logic long before economics or finance.7 In economics, it indicates that the future changes of prices are unpredictable.8 It describes the movements of prices as random departures from previous ones.

When there are no interferences, and if the information is reflected by stock prices right away without delay, tomorrow’s price change reflects only tomorrow’s shocks and thus does not have any relation to today’s price change. The term “shock” semantically entails unpredictability; hence, the price changes are also unpredictable and random, which suggests that prices do not have memory, insofar as they do not remember the financial shocks of the past.9 This implies that prices fully reflect all information, which is a sign of an efficient market, and even uninformed investors can obtain a generous rate of return.10 In his book, “A Random Walk Down Wall Street” (1973), Malkiel explains the concept of a random walk via the metaphor of a chimpanzee throwing darts at the Wall Street Journal.

However, the chimpanzee is blindfolded and the darts it throws are doing as well as the darts thrown by experts.11 Hence, Malkiel’s comparison indicates that if the market is efficient it is irrelevant whether an investor is informed or uninformed because the returns will be the same in either case. So, according to the hypothesis, investors cannot make excess profit and beat the market in cases where the market is efficient. While the EMH was previously only popular in the academic world, Malkiel’s book elevated it so that it began to be acknowledged by professionals.

III Variations of the Efficient Market Hypothesis However, Eugene Fama and Paul Samuelson – both pioneers in the articulation of the EMH – interpreted the hypothesis in two different ways.12 On the one hand, Fama viewed the hypothesis as expressing normative knowledge about traders’ practices such as investment strategies. On the other hand, Samuelson held that the EMH expressed normative knowledge supporting practitioners, especially public policymakers. Samuelson aimed to observe whether financial 6

Malkiel, B. G. (2003), “The Efficient market Hypothesis and Its Critics”, Journal of Economics Perspectives, Vol. 17, Number 1, Pages 59-82 7 Sewell, M. (2011), “History of the Efficient Market Hypothesis”, UCL Department of Computer Science 8 Titan, A. (2015), “The Efficient Market Hypothesis: review of specialised literature and empirical research”, Procedia Economics and Finance, Vol. 32 9 Titan, A. (2015) 10 Malkiel, B. G. (2003) 11 Malkiel, B. G. (2003) 12 Delcey, T. (2019)

Understanding The E cient Market Hypothesis

markets were “well-functioning” by looking at concerns like social benefits of speculative markets or pareto-optimality. However, Fama’s main concern was how various financial strategies are unrelated to each other.13 While Fama believed that stock market prices followed random walks,14 Samuelson supported the martingale concept, which suggests prices follow a martingale pattern.15 It is worth acknowledging that the EMH itself can be articulated in slightly different ways.

Moreover, there are three forms of the EMH that Fama described in his 1970 article; weak, semi-strong, and strong. The weak form is aligned with the random walk process and implies that current stock prices incorporate all historical and existing market information. This form argues that, in the long run, there are no abnormal profits for anyone investing in these stocks, and even technical analysis cannot aid investors. However, the weak form posits that fundamental analysis can be used to determine undervalued and overvalued stocks, allowing for occasional excess returns. The semi-strong EMH builds on the weak form and adds that only private information, which is not readily available to the public, can help obtain excess returns. According to the strong-form EMH, stock prices incorporate all the information, whether public or private. This includes historical financial information (weak form), all new public information (semi-strong form) and all private information.16 In this scenario, it is impossible to obtain returns higher than the general market.

These three forms of the EMH have been variously tested. The majority of findings for the semi-strong form are quite inconclusive, although the results indicate contradicting market inefficiencies regarding the case of the strong form.17 Some evidence for the weak form displays that abnormal returns are mainly caused by chance, which supports its initial claims. Other evidence, however, shows that the irregularities go away with changes in the used model.18 Note that most of the empirical studies are short term event studies. Some investigate the three types by observing the reaction after the first few days of the price announcements to see if the prices quickly adapt to the new information. Other studies are more long term and observe if the prices adjust to the released information gradually or instantly, given that the former would be invalidating for the EMH. Thus, empirical studies are unable to conclusively validate or invalidate the EMH and its different forms.

13

Delcey, T. (2019) Eugene, F. Fama (1970) 15 Delcey, T. (2019) 16 Titan, A. (2015) 17 Malkiel, B. G. (2003) 18 Titan, A. (2015) 14

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IV Recent Findings on the Efficient Market Hypothesis In recent years the empirical credibility of the EMH for investors and researchers has declined given the sparse evidence supporting it. For instance, work by Lo and Mackinlay (1999) found that short-run serial correlations are not zero, and therefore prices are not entirely random. Also, studies have observed many successive movements of prices in the same direction, undermining the notion of random walks since this directionality indicates momentum in short-run stock prices.19 Also, Lo, Mamaysky and Wang (2002) used nonparametric statistical techniques that recognize patterns and found that some stock price signals might have some predictive power.

This is significant counter-evidence against the EMH.20 In 1976, Grossman put forward the market efficiency paradox. The paradox indicates that the market becomes less efficient as more investors believe in its efficiency. The reason behind this is that if the market is considered efficient, the participants passively accumulate information without acting on it, which creates inefficiencies.21 In such a case, undervalued and overvalued stocks are not distinguished. By contrast, if the participants do not believe in the EMH, the market is actually made more efficient. This is because those who do not think so will spend all their resources to exploit mispricings. This exploitation will eventually lead to a correction of prices so that they ultimately reach their fair value once the new information is acted on. Thus, Grossman proposes that the market actually becomes efficient when people believe it is inefficient.

Another weakness of the EMH was revealed at the beginning of the 21st century with the development of behavioral finance. According to behavioral finance, psychological influences may affect market outcomes. This approach shifts the focus away from the EMH, and instead locates causes of economic outcomes in human behavior. Behavioral finance claims that, unlike what the EMH suggests, stock prices are in fact predictable and not random. Therefore, it is possible to outperform the market by capitalizing on predictable patterns.22 Psychologists and economists that deal with behavioral finance believe that the short run momentum of prices is consistent with psychological feedback mechanisms. Thus, when a stock price is increasing, the participants become interested in the market with a “bandwagon effect”. Moreover, investors may sometimes underreact to new information which explains how there are patterns in short-run momentum. With time, behavioral finance has become more popular in the financial world and has made the idea of momentum, in contrast to randomness, more reasonable.23 19

Malkiel, B. G. (2003) Malkiel, B. G. (2003) 21 Degutis, A., Novickyte, L. (2014) 22 Naseer, M., Tariq Y. (2016), (The Efficient Market Hypothesis: A Critical Review of The Literature”, The IUP Journal of Financial Risk Management, Vol. 12, No. 4, Pages 48-63 23 Malkiel, B. G. (2003) 20

Understanding The E cient Market Hypothesis

By contrast, even though behavioral hypotheses on the bandwagon effect and investor ‘underreaction’ are noteworthy, the evidence that they occur in real life are not quite strong. For instance, Fama in 1998 completed “event studies” and found that underreaction to news is as equally common as overreaction, plus the post-event continuation of abnormal returns is as likely as post-event reversals. Therefore, it is not certain whether behavioral finance is fully correct in its opposition to the EMH or not.

The opposition between behavioral finance and the EMH has not reached a conclusion. However, a new framework was created by Andrew Lo in 2004 called The Adaptive Market Hypothesis.

The Adaptive Market Hypothesis combines the EMH and behavioral finance to propose a common ground between the two approaches. Lo’s new hypothesis implies that the efficiency of the stock market depends on environmental factors within the market ecology, such as how adaptive the participants are or the number of competitors present.24 The examples within behavioral finance that argue markets are inefficient, like loss aversion or overconfidence, are thus understood to be consistent with the evolutionary model of behavior such as adaptation to new environments. The Adaptive Market Hypothesis therefore suggests that the information reflected by stock prices are controlled by the combination of environmental conditions and the number and nature of the participants in the economy.

In addition, the EMH was tested in European stock markets in the 2000s, which helped comprehend how the theory applies to today’s financial reality. Tests on the weak-form market efficiency were performed on stock market indexes in France, Spain, the United Kingdom, Germany, and Portugal from January 1993 to December 2007.25 These evaluations included runs tests and joint variance ratio tests, which were completed using daily and weekly data. It was found that the daily data did not support the EMH for Portugal and Greece because of first-order positive autocorrelation in the returns. However, the empirical evidence displayed that the indexes followed a martingale behaviour after 2003. Data for France and UK did not support the EMH because there was mean reversion in the weekly data, which was even more pronounced in recent years. Finally, the markets for Germany and Spain were the most efficient out of all of them. Testing of the EMH thus had produced various conclusions throughout different European markets.

24

Lo, A. (2010) “Reconciling Efficient Markets with Behavioral Finance: Adaptive Markets Hypothesis”, Journal of Investment Consulting, Vol. 7, No. 2, Pages 21-44 25 Borges, R. M. (2010), “Efficient Market Hypothesis in European Stock Markets”, The European Journal of Finance, Vol. 16, No. 7, Pages 711-72

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V Conclusion In conclusion, the EMH has become a highly disputed theory. However, it is still an ongoing debate in economics and modern finance. The concept is theoretically interesting; however, empirical evidence often does not reflect it. Many studies indeed reveal the inefficiency of certain markets and new theories have been put forward to replace the EMH. On the other hand, many cases have demonstrated that investors often cannot earn excess returns, and stock prices are thus closer to being efficient. Hence, both sides remain defendable. It is not possible to conclude if the markets are only efficient in the long run or not by looking at empirical testing, because there is also a need for additional theoretical framing about information structures that supports the decision making of the investors.26 Most importantly, as time passes, new methods of testing and new theories are emerging continuously. Therefore, it would be bold to assume that the conclusions on the EMH will stay the same. As new information is revealed and technological changes occur, the EMH is being even more discussed. However, the evidence collected thus far shows that calling the markets “fully” and “always” efficient is incorrect.27 In short, there is room for further empirical studies and for older theories to be replaced by new ones. Until then, the Efficient Market Hypothesis’ status as a valid theory that reflects our financial reality remains debatable.

References Alajbeg D., Bubas Z., Sonje V. (2012), “The Efficient Market Hypothesis: Problems with Interpretations of Empirical Tests”, Financial Theory and Practice, Vol. 36, No. 1, Pages 53-72 Borges, R. M. (2010), “Efficient Market Hypothesis in European Stock Markets”, The European Journal of Finance, Vol. 16, No. 7, Pages 711-726 Degutis, A., Novickyte, L. (2014), “The Efficient Market Hypothesis: A Critical Review of Literature and Methodology”, Ekonomika, Vol. 93, Pages 7-23 Delcey, T. (2019), “Samuelson vs. Fama on the Efficient Market Hypothesis: The Point of View of Expertise”, Economia, Vol. 9, No. 1, Pages 37-58

26

Alajbeg D., Bubas Z., Sonje V. (2012), “The Efficient Market Hypothesis: Problems with Interpretations of Empirical Tests”, Financial Theory and Practice, Vol. 36, No. 1, Pages 53-72 27 Naseer, M., Tariq Y. (2016

Understanding The E cient Market Hypothesis

Eugene, F. Fama (1970), “Efficient Capital Markets: A Review of Theory and Empirical Work.”

The Journal of Finance, Vol. 25, No. 2, Pages 383-417 Klein, D. B. (2018), "Eugene F. Fama.”, Econ Journal Watch, vol. 15, No. 3, Pages 365+ Laffont, J. J., Maskin S. E. (1990), “The Efficient Market Hypothesis and Insider Trading on the Stock Market”, The University of Chicago Press, Journal of Political Economy, Vol. 98, No. 1, Pages 70-93 Lo, A., Mamaysky H., Wang J. (2002), “Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation”, The Journal of Finance, Vol. 55, Number 4, Pages 1705-1765 Lo, A. (2010) “Reconciling Efficient Markets with Behavioral Finance: Adaptive Markets Hypothesis”, Journal of Investment Consulting, Vol. 7, No. 2, Pages 21-44 Malkiel, B. G. (2003), “The Efficient market Hypothesis and Its Critics”, Journal of Economics Perspectives, Vol. 17, Number 1, Pages 59-82 Malkiel, B. G. (2005), “Reflections on the Efficient market Hypothesis: 30 Years Later”, The Financial Review, Vol. 40, Number 1 Naseer, M., Tariq Y. (2016), (The Efficient Market Hypothesis: A Critical Review of The Literature”, The IUP Journal of Financial Risk Management, Vol. 12, No. 4, Pages 48-63 Sewell, M. (2011), “History of the Efficient Market Hypothesis”, UCL Department of Computer Science Sewell M. (2012), “The Efficient Market Hypothesis: Empirical Evidence”, International Journal of Statistics and Probability, Vol. 1, No. 2 Titan, A. (2015), “The Efficient Market Hypothesis: review of specialised literature and empirical research”, Procedia Economics and Finance, Vol. 32

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Canada’s Carbon Tax Scheme: Analysis of the Current System and Recommendations for the Future

By Raya Ayoub, Camila Bayona, James Dinh, Lola Luhmann, and Zhaodong Wang Written for ECON 408: Public Sectors Economics I Edited by Nada Abdelhamid, Jing Hang, and Molly Flanagan

Abstract In 2015, Canada’s federal government initiated the Pan-Canadian Framework on Clean Growth and Climate Change to comply with its promise of reducing greenhouse gas emission levels by 30 percent below 2005 levels by 2030, as outlined in the Paris Agreement. To study the feasibility of the cap-and-trade system and the carbon tax system in Canada, the Liberal Party’s and the Green Party’s environmental policies were analyzed. The carbon tax implemented by the Liberal Party was carried out for producers utilizing specific kinds of fuels and combustible waste. The Green Party’s “Fee and Dividend Plan’’ was a tax set to increase by $10 until there were no carbon emissions, with tax revenue given back to Canadians through equal dividend cheques. Feasible solutions are proposed in the paper to address the current inefficiencies of the federal government’s carbon tax plan: the implementation of a carbon border tax, the introduction of the cap-and-trade system, and the expansion of the current policies. The carbon border tax provides an extra incentive to reduce emissions while eliminating the free-rider issue.

The cap-and-trade system would be a more cost-effective system for the Canadian government, but only ideal if price volatility is limited, political obstacles are removed, and the free-rider issue does not arise. Finally, additional policies can be implemented to improve on the current carbon tax plan, where inefficiencies in the transportation sector are addressed.

Keywords: Carbon Tax, Paris Agreement, Liberal Party, Green Party, Carbon Border Tax, Cap and Trade, Transportation Policy

Canada’s Carbon Tax Scheme: Analysis of the Current System and Recommendations for the Future

I Introduction Human-induced climate change is the primary dilemmas facing Canada and the world at large. A growing body of evidence, such as increasing global temperatures, unpredictable weather patterns, and various other challenges, is showing that climate change is brought on by the excessive emission of greenhouse gases (GHGs), among which carbon dioxide is identified as the main component.1 To address these issues, the Paris Agreement was created for greenhouse gas emission reductions—to which Canada has pledged. However, Canadian policies over time have been highly insufficient to address the climate crisis.

Although Canada is currently producing more oil than it consumes—being the largest foreign supplier of crude oil to the U.S. in 20202—it has recently begun to implement policies aiming to reduce carbon emissions. Various organizations believe that the carbon tax policy is an efficient way of accelerating GHG reduction, but there are still challenges and disagreements on its implementation.

Why carbon pricing is important Carbon pricing is a result of the consequences brought on by climate change. The global average temperature has risen by over 1°C since the start of the Industrial Revolution. While this may not seem like a significant increase, it has led to devastating effects worldwide, including rising sea levels due to melting glaciers. At the same time, one can also observe an undeniable biodiversity loss, changing weather patterns, and increasing air pollution. These negative externalities are caused by human activities emitting GHG emissions such as carbon dioxide, methane, and water vapor.

II Federal Carbon Tax As the name indicates, a carbon tax implies levying a tax on the carbon content emitted by households and industries. Generally speaking, a carbon tax is considered convenient to implement, cost-effective, and efficient; it allows businesses to plan ahead after receiving clear information on the tax being implemented. The government sets the tax rate by determining the external costs of polluting emissions in Canada, so consumers and producers of pollution are compelled to pay for the external costs they impose on society. As for regulators, they have to enforce a price per unit of emission to give emitters incentives to pollute less and avoid paying the tax. Mathematically, the imposition of a carbon tax fulfills the equimarginal principle, as 1 2

Government of Canada. (2016). Working group on carbon pricing mechanisms: final report Government of Canada. (2020). Crude oil

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emitters will reduce emissions until their marginal abatement costs are equal to the tax. In other words, they will be equalizing marginal abatement costs across different sources. The broader the coverage, the more cost-effective and efficient it will be. Tax revenues, generated from collecting carbon taxes, can be spent on subsidizing clean energy, energy efficient upgrades or other climate policy related objectives. Carbon tax revenues are considered as double-dividend, in which the first dividend is the reduction in emissions and improvement of environmental quality, and the second dividend is the increase in consumption, savings, work effort, and investment in the economy due to lower tax rates. However, it remains that the establishment of carbon pricing could have a negative impact on the GDP growth rate.3

III The Liberal Party’s Carbon Tax Schemes In 2015, shortly after Justin Trudeau became the leader of Canada’s Federal Political Party, he provided a detailed report of his party’s intentions with regards to the conservation of the environment. In its first term, the Liberal Party was willing to commit to a $2 billion low carbon economy trust that funded projects aiming to reduce carbon emissions; this was designed to encourage and support clean energy technology while reducing GHG emissions. In addition, an investment of $100 million was financed each year to stimulate the use of clean technology.4 For Canada to retain its internationally recognized reputation with regards to environmental conservation, the party planned to attend the Paris Climate Summit and support the G20 commitment of phasing out fossil fuel subsidies, while establishing a North American clean energy and environmental agreement with the US and Mexico.5 Following the party’s most recent election in 2021, the Liberal Party has established their commitment to reducing the number of fossil fuel producers. Trudeau’s party aimed to achieve their domestic goal of increasing the current $20 per tonne of emissions to $50 per tonne in 2022.

The higher carbon price will be implemented through two streams: a fuel charge and an output-based pricing system. While the former specifically applies the higher price to producers who utilize specific kinds of fuels and combustible waste, the latter targets industrial emitters producing more than 50,000 tonnes of emissions per year. The costs stemming from the fuel charge are directly passed on to the consumer in the form of an additional 4.4 cents per liter of gasoline. The extra revenue generated by the fuel charge results in projected revenue of $2.6 billion per year, which can be utilized to invest in green technologies and further encourage emission reduction. However, under this fuel charge system, companies can easily relocate to different countries or freeride on the reductions generated by other countries. Additionally, 3

Appendix A: Projected Real GDP in Canada With and Without Carbon Pricing Tasker, J. P. (2015). New plan for a strong middle class. Liberal Party of Canada 5 Gamage, M. (2021). Where they stand: the parties on climate change. The Tyee 4

Canada’s Carbon Tax Scheme: Analysis of the Current System and Recommendations for the Future

developing countries are expected to leapfrog to newer technologies, which casts doubt on the system’s true fairness and effectiveness. Lastly, it is difficult to accurately measure how much carbon is truly produced and the exact amount of carbon tax which would reduce emissions effectively.

On the other hand, an output-based pricing system (OBPS) operates by setting an emission target based on previous averages of emissions. Companies who produce below the target of 50,000 tonnes of emissions will earn credits on the unused units, and those who exceed the threshold will pay a carbon tax on the portion that exceeds the target.6 Emitters are given three options to pay for their outflow of GHG emissions: they are able to pay the carbon tax, buy carbon offsets or buy credits from lower-emitting firms for potentially less than the carbon price. The OBPS forces targeted sectors to adopt low pollution levels and implement cleaner low-carbon technologies. The trading of credits leads to quicker and automatic reductions of pollution as it gives firms more flexibility and rewards those who invest in innovation and technological advances. Furthermore, the government revenue generated can be invested in infrastructure, social programs, or national defense. This system is often used on large carbon emitters, encouraging the use of new technologies and the formation of clean energy jobs, while small producers use carbon taxes instead.7 Despite these advantages, the OBPS does not encourage some industries to change their pollution habits, as the price of purchasing credits from low polluters is lower than that of shifting to cleaner technology. Additionally, emitters don’t pay the price on all their emissions– only on the amount by which their emissions exceed industrial averages. The OBPS also does not encourage emission reduction beyond the target level. The graph in Appendix B compares the effect of fuel charge and the OBPS on the price of carbon since 2019.8

IV The Green Party’s Fee and Dividend Plan In comparison to the Liberal Party, the Green Party offers a more ambitious set of commitments, with a carbon tax that accrues indefinitely over time. As part of their 2015 electoral climate change scheme, the Green Party proposed a “Fee and Dividend Plan,’’ also known as a carbon tax with a recyclable tax system where revenue is returned or ‘recycled’ to taxpayers. This plan is projected to be ineffective compared to the Liberal’s output-based pricing system to reduce GHG emissions, based on the evaluation of British Columbia, which has a comparable tax scheme. In 2020, the Green Party offered an alternative price for the carbon tax. While the Liberal plan is to 6

Connolly, A. (2019). Here's where the federal parties stand on the carbon tax. Global News Pembina Institute. (2019). Output-based carbon pricing system incentivizes innovation, provides certainty for industry 8 Purcell, B. (2018). Lowdown on the new federal carbon pricing system. The Atmospheric Fund 7

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keep increasing by $10/tonne per year until 2020, the Green Party aims to increase by $10 until there are no more carbon emissions.9 The price also applies to all emitters with no specification to industry, business size, or type of emissions. The same recyclable tax scheme as proposed in 2015 still applies, where collected tax revenue would be given back to Canadians through equal dividend cheques.

In 2015, the carbon tax was set to charge $30/tonne of GHG emissions, which is equivalent to BC’s carbon tax in 2015. To analyze its implications, as the Green Party was not elected in 2015 and could not institutionalize its policies, this section will evaluate the effectiveness of BC’s carbon tax in 2015.10 Several weaknesses are exhibited in BC’s carbon tax. If the ultimate goal of the carbon tax is to reduce emissions, this goal has failed, as there has been a gradual increase in GHG emissions since 2010 in BC. This result is found by eliminating spurious correlations that might lead to a decrease in GHG levels, such as the recession in 2007 that left many workers unemployed, unable to drive to work, spend on vacation, and therefore reducing overall emissions of greenhouse gases.11 Additionally, it’s hard to place fees on GHG emission sources like agricultural and waste methane. Thirdly, pollution abatement technology is expensive and some polluters might find it cost-minimizing to pay the tax and pollute instead. A study by Marc Lee, an economist at the Canadian Center for Policy Alternatives (CCPA), shows that for the carbon tax to actually incentivize consumers and producers, the Green Party would instead have to aim for a raise to at least $200/tonne.12 Some other concerns arise with the dividend aspect of the 2020 plan. The Green Party estimated they could raise $22 billion in revenue that year, however, the CCPA estimates that a $30/tonne of taxed carbon will only raise $16 billion in revenue. Further, the Green Party aims to return the money to constituents by creating reusable schemes and offering equal tax cuts to all Canadians, which could gloss over inequality issues that might arise from taxing all individuals the same amount. Compensation via lump-sum transfers is progressive because fixed amounts of compensation account for a greater proportion of income in low-income households. However, such revenue could also be used for green infrastructure instead, to contribute to further reductions in GHG emissions.

9

Connolly, A. (2019) Klein, S. (2015). Some strengths and weaknesses in the Green Party platform. Policy Note 11 Lee, M. (2021). It's 2021: Time to get serious about BC's carbon emissions. Policy Note 12 Lee, M. (2021) 10

Canada’s Carbon Tax Scheme: Analysis of the Current System and Recommendations for the Future

V Recommendations As previously discussed, newly-introduced carbon reduction policies in Canada are efficient to the extent that they successfully achieve emission-cuts targets set by the government. However, they not only fail to incentivise reduction efforts in participating industries, but they also allow main polluters to dissipate the tax burden elsewhere. Canada’s revised climate 2030 plan and targets remain both incompatible with the Paris Agreement and unrealistic.13 Based on current policies and the federal budget, it is estimated that Canada will not reach its emissions targets.

Consequently, the Canadian government should study the feasibility of (1) implementing a carbon border tax, (2) introducing a broader cap-and-trade system, and (3) expanding current policies to other industrial sectors to address current inefficiencies.

Firstly, a carbon border adjustment tax implies setting a duty on imports based on the amount of carbon emissions resulting from their production.14 Thus, the border tax addresses the free-rider problem from which richer and high-polluting multinationals benefit; it adjusts tariffs according to the environmental policies in countries with weaker carbon regulations and lower production costs. Earlier this year, the European Union announced its intention to implement a carbon tariff on imports from countries that are not complying with the Paris Agreement’s accords on GHG emissions reductions.15 In theory, adopting adjustment-policies would help prevent undercutting from companies shifting production overseas, while leveling the playing field for countries and industries with heavier carbon taxation. For instance, a cross-border tax in Canada would place a levy on imports of materials including steel, aluminum, cement, and fertilizers from nations and foreign companies with less strict environmental rules. Thus, companies within Canada would be less incentivized to transfer operations overseas, and international companies would be incentivized to reduce their emission.16 Essentially, this makes the use of domestic products more attractive to protect and promote local business while reducing overall emissions.

Implementing a carbon tax faces several complications. The scheme would have to be created by taking into account preambles of already existing agreements such as the Paris Agreement. A border carbon tax could violate the core principle of the Paris Agreement, which is that richer countries should bear greater responsibility for cutting emissions.17 Likewise, in the short term, companies hoping to sell certain goods to Canada or the European Union would need to monitor and verify their emissions, which would require the implementation of new metrics and accounting standards. Other countries, especially heavy producers of aluminum and steel, could 13

Appendix C: Canada’s ranking and standing towards Paris Agreement compatibility Prazeres, T., & Xie, Z. (2021). What is a carbon border tax and what does it mean for trade? World Economic Forum 15 Plumer, B. (2021). Europe is proposing a border carbon tax. What is it and how will it work? The New York Times 16 Canada. (2021). Climate Action Tracker 17 Canada. (2021). Climate Action Tracker 14

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try to object to a border carbon tax by raising the prospect of retaliatory tariffs and trade wars.18 Thus, strong international cooperation is necessary. Transparency and non-discrimination should remain key principles of any global understanding towards reducing emissions, and there should be assurance that carbon-related measures do not restrict trade.19 Secondly, the cap-and-trade policy aims to limit emissions in the most cost-effective way. It sets a cap on emissions by introducing a market where polluters can trade government allocations through free negotiation and bargaining, leading to more efficient economic allocations. Some of the most noticeable cap-and-trade participants are the Northeastern United States, California, China, and Quebec. The Northeastern United States implemented the “Regional Greenhouse Gas Initiative” to facilitate power plants' needs to auction carbon pollution permits. Until 2019, the program was successful at keeping carbon prices at modest levels, while reinvesting raised money from auctions in new efficiency and clean energy programs.20 California, one of America's biggest states, has also implemented the cap-and-trade system, which covers manufacturers, refineries, and other main polluters. Similar to the Northeastern United States, their system has been able to keep prices at modest levels. However, California’s high success in climate control comes from its integration of other climate regulation policies, in addition to cap-and-trade.21 Lastly, Quebec has been implementing the cap-and-trade system for greenhouse gas emissions since 2013, covering fossil fuel combustion and industrial emission with the goal of reducing emissions by 37.5% from 1990 levels by 2030 and 80%-95% by 2050.22 On paper, the cap-and-trade system looks like a promising addition to Canada’s current carbon tax policies, but only if it is properly designed, regulated, and implemented. For the system to work, the structure needs to fulfill the principles of the Coase theorem: low transaction costs, basic rights clearly understood, and few parties involved. Likewise, even though cap-and-trade theoretically requires limited government involvement, it still demands a high amount of research and initial regulation to properly address system complications such as price volatility. For instance, since 2019, price fluctuations have become a major issue in American’s cap-and-trade systems, as well as the EU's own Emission Trading System. The high carbon prices discourage polluters from buying permits and stifling the economy. If price volatility cannot be controlled, then taking a risk with high prices would not be advisable, as the EU’s current allowance price of $60/tonne is higher than Canada’s current 2022 targets. Furthermore, it could also cause political obstacles for the two parties, as tradable permits are often used to build political support. Giving away free permits to gain support during a campaign ultimately leads to a distortion of economic 18

Plumer, B., & Popovich, N. (2019). These countries have prices on carbon. Are they working? The New York Times 19 Prazeres, T., & Xie, Z. (2021) 20 Plumer, B., & Popovich, N. (2019) 21 Plumer, B., & Popovich, N. (2019) 22 The cap-and-trade system in Québec. (2016). Center For Public Impact (CPI)

Canada’s Carbon Tax Scheme: Analysis of the Current System and Recommendations for the Future

activity by reducing the revenue that the government collects.23 Lastly, the free-rider problem would also emerge when carbon prices fluctuate dramatically. If the cost of punishment for polluting is lower than the cost to purchase the permits themselves, polluters will have little to no incentive to buy permits. They will eventually pollute without a permit and take the cost of punishment, as it makes more economic sense. Market failure, caused by the free-rider problem, would render the cap-and-trade system ineffective. Having pointed out the potential issues, if the Canadian government can help stabilize and limit the fluctuation of permit price, cap-and-trade would prove to be an effective solution, as it is significantly more well-incentivized than the original carbon tax plan.

Finally, expanding carbon incentives to other major polluting industries such as the transportation industry, which accounts for 28% of Canada’s total greenhouse emissions, would set the country a step closer to achieving its reduction targets towards Paris Agreement compatibility. Currently, Canada has implemented a light-duty zero-emission vehicles policy sales target of 30% and 100% by 2030 and 2040 respectively; in addition to the Clean Fuel Standard and GHF offset program which requires producers and importers of liquid fuels to reduce, annually, the carbon intensity of their fuels by 2030.24 However, these policies remain highly inadequate to address the larger sources of emissions generated by the aviation and shipping sector, as gasoline used for these activities remains exempt from regulation. Action in this sector is critical, as Canada’s 2030 projections have shown an increase of 16% in transportation emissions.25 According to Eric Denhoff of the Canadian Fuel Cell Association, a tax of $30 should be implemented to reinvest into green aviation operations as, in the long term, the endowing of biojet fuel over traditional fuels is expected to reduce emissions by up to 80%.

However, the National Airlines Council of Canada estimates that a $30/tonne carbon tax would translate to ticket prices increasing by an average of $25.70. Therefore, to prevent the tax burden from being passed to consumers, preferential tax deductions for airlines investing on reduction technologies should also be created.26

23

Schmalensee, R., & Stavins, R. (2019). Learning from thirty years of cap and trade. Resources.org Transport Canada. (2021). Canada's zero-emission vehicle (ZEV) sales targets. Government of Canada 25 Canada. (2021). Climate Action Tracker 26 Neufeld, R., & Massicotte, P. J. (2017). Decarbonizing transportation in Canada: report of the standing senate committee on energy, the environment and natural resources (Ser., documents collection). Senate Canada 24

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VI Conclusion The Liberal Party’s carbon levy effectively increased the price of gasoline by passing the burden of an additional 4.4 cents onto the consumer and generated a government revenue of $2.6 billion a year. However, emitters could easily relocate to other countries while free riding on the technological advancements of other companies. The Green Party’s plan and its projected revenue targets and outcomes were analyzed by looking at a comparable carbon tax system implemented in BC. The Green Party’s Fee and Dividend Plan exhibits several weaknesses. First, it is hypothesized that the tax will be unable to reduce GHG emissions (based on results from BC). It is also highly likely that it will fail to meet its projected revenue target of $22 billion in 2022. Additionally, the progressive lump-sum tax repayments exhibit some distributional issues and are not necessarily the most environmentally favorable way to spend the tax revenue.

To address current inefficiencies and reach Paris Agreement compatibility, three solutions are proposed. First, a carbon border tax to incentivize emission reduction by eliminating the free-rider problem and thus, leveling the playing field for local business. Second, widespread cap-and-trade represents a cost-effective targeting policy that, if well established, allows the Canadian government to overcome potential price volatility issues. Last, extending the current carbon-tax policy to other industrial sectors, especially the transportation industry, will allow Canada to reach its reduction targets by 2050.

VII Appendices Appendix A

Projected Real GDP in Canada With and Without Carbon Pricing (Government of Canada)

Canada’s Carbon Tax Scheme: Analysis of the Current System and Recommendations for the Future

Appendix B

Comparison of Canadian cap and trade price and carbon levy since 2019 (Purcell, 2018) Appendix C

Canada’s ranking and standing towards Paris Agreement compatibility

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VIII References Canada. (2021). Climate Action Tracker. Retrieved from: https://climateactiontracker.org/ countries/canada/ .

Connolly, A. (2019). Here's where the federal parties stand on the carbon tax. Global News.

Retrieved from: https://globalnews.ca/news/5437635/federal-election-climate-change-platforms/.

Gamage, M. (2021). Where they stand: the parties on climate change. The Tyee. Retrieved from: https://thetyee.ca/News/2021/08/31/Where-Parties-Stand-Climate-Change/.

Government of Canada. (2018). Pan-Canadian framework on clean growth and climate change. https://www.canada.ca/en/services/environment/weather/climatechange/pan-canadian-fra mework/climate-change-plan.html.

Government of Canada. (2016). Working group on carbon pricing mechanisms: final report.

Retrieved from: http://publications.gc.ca/collections/collection_2016/eccc/En4-287-2016-eng.pdf.

Government of Canada. (2020). Crude oil. Retrieved from: https://www.nrcan.gc.ca/science-and-data/data-and-analysis/energy-data-and-analysis/ene rgy-facts/crude-oil-facts/20064.

Government of Canada. (2018). Estimated impacts of the federal carbon pollution pricing system. Retrieved from: https://www.canada.ca/en/services/environment/weather/climatechange/climate-action/pri cing-carbon-pollution/estimated-impacts-federal-system.html.

Klein, S. (2015). Some strengths and weaknesses in the Green Party platform. Policy Note.

Retrieved from: https://www.policynote.ca/some-strengths-and-weaknesses-in-the-green-party-platform/.

Lee, M. (2021). It's 2021: Time to get serious about BC's carbon emissions. Policy Note.

Retrieved from: https://www.policynote.ca/carbon-emissions/.

Canada’s Carbon Tax Scheme: Analysis of the Current System and Recommendations for the Future

Neufeld, R., & Massicotte, P. J. (2017). Decarbonizing transportation in Canada: report of the standing senate committee on energy, the environment and natural resources (Ser., documents collection). Senate Canada. Retrieved from: https://sencanada.ca/content/sen/committee/TransportationReport_FINAL_e.pdf.

Pembina Institute. (2019). Output-based carbon pricing system incentivizes innovation, provides certainty for industry. Pembina Institute. Retrieved from: https://www.pembina.org/media-release/output-based-carbon-pricing-system.

Plumer, B., & Popovich, N. (2019). These countries have prices on carbon. Are they working?

The New York Times. Retrieved from: https://www.nytimes.com/interactive/2019/04/02/climate/pricing-carbon-emissions.html.

Plumer, B. (2021). Europe is proposing a border carbon tax. What is it and how will it work? The New York Times. Retrieved from: https://www.nytimes.com/2021/07/14/climate/carbon-border-tax.html.

Plumer, B. (2017). Just how far can California possibly go on climate? The New York Times.

Retrieved from: https://www.nytimes.com/2017/07/26/climate/california-climate-policy-cap-trade.html.

Prazeres, T., & Xie, Z. (2021). What is a carbon border tax and what does it mean for trade?

World Economic Forum. Retrieved from: https://www.weforum.org/agenda/2021/10/what-is-a-carbon-border-tax-what-does-it-mea N-for-trade.

Province of British Columbia. British Columbia's carbon tax - province of British Columbia.

Retrieved from: https://www2.gov.bc.ca/gov/content/environment/climate-change/clean-economy/carbonTax. Purcell, B. (2018). Lowdown on the new federal carbon pricing system. The Atmospheric Fund.

Retrieved from: https://taf.ca/lowdown-new-federal-carbon-pricing-system/.

Schmalensee, R., & Stavins, R. (2019). Learning from thirty years of cap and trade.

Resources.org. Retrieved from: https://www.resources.org/archives/learning-thirty-years-cap-trade/.

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Tasker, J. P. (2015). New plan for a strong middle class. Liberal Party of Canada. https://liberal.ca/wp-content/uploads/sites/292/2020/09/New-plan-for-a-strong-middle-cla ss.pdf.

The cap-and-trade system in Québec. (2016). Center For Public Impact (CPI). Retrieved from: https://www.centreforpublicimpact.org/case-study/cap-and-trade-system.

Transport Canada. (2021). Canada's zero-emission vehicle (ZEV) sales targets. Government of Canada. Retrieved from: https://tc.canada.ca/en/road-transportation/innovative-technologies/zero-emission-vehicle s/canada-s-zero-emission-vehicle-zev-sales-targets.

John Stuart Mill On the Merits of Colonization

By Sophie Strassmann Written for ECON 460: Honours History of Economic Thought I Edited by Jing Hang, Caleb Sansom, and Nada Abdelhamid

I Introduction We often forget that classical liberal economists such as Adam Smith and John Stuart Mill lived in the same period of British history as the era of the British empire. The 19th century presented economists with a complex historical context surrounding international trade and imperialism, especially Britain's presence in India. The massive failed revolt of 1857 challenged England's military and administrative authority in the region, and India would not see independence for another hundred years. It was in this same England that the last of the classical economists resided.

Setting aside questions of morality, these classical economists opposed colonization on an economic basis. Generally, the surviving argument was that the costs of colonization, especially concerning India, outweighed its merits in contributing to British peoples' average living standards.1 Seminal scholar J.S. Mill wrote on topics ranging from philosophy to economics and political science; at the time of his compositions, England was already in control of modern-day India, and this served as the basis for much of his detailed writings on imperialism. Did Mill support colonization of countries with generally lagging levels of overall economic development? And if so, what benefits did he foresee when most economists opposed intervention? A widely respected economist and high-ranking official of the East India Company, Mill argued that colonization would provide the most attractive solutions to Britain's economic problems of the time. He believed the intervention would stabilize the free market to increase British profits, raise wages, lower local consumer prices, resolve surplus issues, and postpone the steady-state; theoretically, this would lead to improved living standards for England's citizens.

1

Sullivan, E. P. (1983). Liberalism and Imperialism: J. S. Mill's Defense of the British Empire. Journal of the History of Ideas, 44:4, pp. 600-605

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II Artificial Dependency Guarantees Beneficial Trade Relations One component of J.S. Mill's economic argument favouring imperialism rested on the notion that having colonies created an international partnership that would lead to guaranteed outlets for economic activity. Sullivan interprets Mill's writings: “He began to fear the protectionist sentiment and legislation of France, Germany, and the United States. He thought that in England's Empire, both the white settler colonies and the dependencies in Ireland, Asia, and Africa might become not just the major but the only areas serving as markets for English capital and as trading partners. As a result, he opposed any colonial moves toward protection or toward making trade an internal rather than imperial matter.”2 Besides his vested interest in preserving viable options for international trade, the question of what colonization meant from a policy standpoint to justify public intervention became a topic of discussion.

III Excess Capital Investment and Population The basis of his reasoning was founded in the assumption that England was simultaneously facing an excess supply of labour (population) and capital investment, which could be artificially reduced and reallocated more efficiently to postpone the steady-state. Reminiscent of Ricardo and Malthus' work on land and population, Sullivan frames Mill's thinking: “Mill maintained that if, with the large amounts of capital, the population remained the same, the cost of labour or wages would rise and hence, profits fall. If, with the large amounts of capital, population increased, there would be a greater demand for food. More inefficient land would be brought into cultivation and hence the price of food and the cost of labour or wages would rise. Again, as wages rise, profits fall.

With the declining rate of profit, all further investment would cease, land would reach the stationary state prematurely.”3 There are at least two implicit assumptions in this thinking. The first is that profits to the wealthy, monopolizing owners of these firms (i.e. the East India British Company) is an appropriate consideration of national welfare when debating whether to intervene. Secondly, it assumes that the wages of British citizens who leave England, rendering domestic labour scarce, are largely excluded from the welfare analysis.

2 3

Sullivan, E. P. (1983): pp. 609 Sullivan, E. P. (1983): pp. 607

John Stuart Mill On the Merits of Colonization

Excess Capital Investment To determine whether colonization would support British interests, Mill demonstrated what he meant by an excess of capital. In his main work, he articulated that “there would never be any deficiency of capital in [developed nations] if its increase were never checked or brought to a stand by too great a diminution of its returns.”4 Here Mill argues that developed nations can never have a shortage of capital unless there is an explicit intervention that tampers with the free market. When referring to the diminution of returns, Mill was likely referring to the simultaneous diminishing quality of natural resources available and the slowed rate of technological advancement.5 Sullivan describes Mill's position on excess capital and surplus investment not as an issue of an overall glut of capital, but one of lower than necessary profit due to the capital available. Sullivan writes that Mill acknowledges that capital in England was being utilized, but that the surplus came from a lower than optimal allocation of capital and profits if England failed to expand operations more optimally in the colonies.6 By framing the issue of investment similarly to modern economics’ ‘market failure’, which requires government intervention to resolve, Mill builds the foundation for his intervention argument.

Excess Population In Mill's mind, England's low living wages resulted from over competition stemming from an excessive supply of low-wage workers. His solution was to resort to what he refers to as emigration, or colonization to bid up the wage. In his discussion on potential remedies to the low wages faced by workers, Mill argues that the causes of poverty “... are in no way mysterious. The dependence of wages on the number of the competitors for employment, is so far from hard of comprehension.” He supports this statement by looking at unions and examining how artificial forms of scarcity remedy the wage issue. Because unions of skilled workers have the desire and capacity to collude, they can artificially inflate wages above their unorganized level. Mill compares the unorganized level to families working at subsistence who do not have this initiative, and he concludes that the generalized applications solution for England lies in making labour scarcer.7 From Mill's point of view, justifying intervention to influence wages is, in part,8 an issue of interpreting the existing observation of market outcomes as a problem of excess labour supply.

4

Mill, J. S. (2001). The Principles of Political economy, pp. 215 The interpretation of what Mill specifically meant by returns is based on the following citation from pp. 216, “An increased production, in default of unoccupied tracts of fertile land, or of fresh improvements tending to cheapen commodities, can never be obtained but by increasing the labour in more than the same proportion.”

6 Sullivan, E. P. (1983): pp. 607 7 Mill, J. S. (2001). The Principles of Political economy, pp. 448 8 Here Mill also discusses the role that education could have in making workers proactive in bidding up their wages.

5

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The solution to this problem, according to Mill, is to improve wages by making labour more scarce. He argues that shipping specific demographics of the British population abroad is a favourable outcome to society, which would not be possible without government support: "The first is, a great national measure of colonization. I mean, a grant of public money, sufficient to remove at once, and establish in the colonies, a considerable fraction of the youthful agricultural population.”910 The follow-up implies that the intervention would target the agricultural sector and prioritize transferring workers during their highest lifetime productive capacity. Mill also proposes that failure to take action would lead to falling wages for labourers, "if no increased stimulus to population and fall of wages ensued, would be permanent; while if there did, profits would rise, and accumulation [would] start forward so as to replace the loss of capital.”11 In Mill's mind, colonization was an urgent matter that could support struggling domestic labourers through some improvement in wages and consumer prices, which adds complexity to the narrative that Mill had confidence in society reaching a long run steady-state.

IV The Steady State Mill famously argued that the steady-state was nothing to be feared. However, this did not prevent him from supporting policies that could help postpone England's steady-state at the slowest possible rate. Since England supposedly had a surplus of capital and labour, he argued that colonization could be a more sustainable solution to postponing the imminent steady-state.

The understanding was that capital in a colony would be more useful than in the homeland. Mill proposed that taxes be levied on the colonies to fund additional resource transfers where the free market would not otherwise yield a socially optimal outcome.12 Then, he argued that the cost of the program was no issue, “[as] colonization on an adequate scale might be so conducted as to cost the country nothing, nor nothing that would not be certainly repaid.”13 The proposal was that such a program would be funded through taxes on the higher profits one should expect from operating capital abroad as opposed to lower ones at home. “[The funds required] would not be drawn from the capital employed in maintaining labour, but from that surplus which cannot find employment at such profit as constitutes an adequate remuneration for the abstinence of the possessor, and which is therefore sent abroad for investment, or wasted at home in reckless

9

Mill, J. S. (2001). The Principles of Political economy, pp. 438 One has to wonder what life Mill planned for such labourers who were transferred to the colonies and how their welfare would be improved by starting life in India's colonies, for example.

11 Mill, J. S. (2001). The Principles of Political economy, pp. 873 12 Hollander, S. (2015). John Stuart Mill: Political Economist. Hackensack, NJ and London: World Scientific. pp.

254-257 13 Mill, J. S. (2001). The Principles of Political economy, pp. 438 10

John Stuart Mill On the Merits of Colonization

speculations.”1415 For Mill, each moment that England failed to move physical capital—funded through moderate taxation on profits—was a blatant squandered opportunity for economic prosperity that could have deferred the steady-state for British citizens and used society's capital relatively more efficiently.

V Conclusion A historical analysis of John Stuart Mill's work teaches the modern reader a valuable lesson in how academic theory, whether it be ethical, economic, or political, can have consequences to real-life policy.16 These consequences can persist even when the dominating voice is unrepresentative of the consensus within the field, as was the case among the classical economists of the time. Mill’s unique use of economic theory to persistently justify the action, combined with his platform in the East India Company, could have helped shape some of the discussions around the parliament's real-world interventions in the colonies, even if they were not necessarily adopted.17 From Mill's framing of free-market outcomes as suboptimal excess to justify intervention, economists can learn to think more critically about when and how market failures need to apply from a research standpoint. They can also learn to be more mindful of the possible limitations of positivist research in economics when framing what is considered a surplus or shortage and what requires intervention. By understanding the history of the economics of empire, Mill's story can be combined with lessons from his debate with Smith to reframe modern discussions of international aid and trade policy.

14

Mill, J. S. (2001). The Principles of Political economy, pp. 438 On pages 871 and 872 of his Principles, Mill echoes this sentiment in a different portion of his writings. He argues that, unlike what classical economists would believe, colonization would not negatively impact labourers because the taxes would not be levied on wages.

16 Jahn, B. (2005). Kant, Mill, and Illiberal Legacies in International Affairs. International Organization, 59:1, pp.

177-207 17 Sullivan, E. P. (1983): pp. 606 15

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VI References Coyne, C. J., & Hall, A. R. (2014); The empire strikes back: Adam Smith, John Stuart Mill, and the Robust Political Economy of empire. Review of Austrian Economics, 27:4, pp.

359-385. [Crossref] Davis, L. E., & Huttenback, R. A. (1982). The Political Economy of British Imperialism: Measures of Benefits and Support. The Journal of Economic History, 42 :1, pp. 119-130. [Crossref] Hollander, S. (2015). John Stuart Mill: Political Economist. Hackensack, NJ and London: World Scientific. pp. 386-423. [Crossref] Hunt, E. K., & Lautzenheiser, M. (2011). History of Economic Thought: A Critical Perspective.

Third edition. Armonk, N.Y. and London: Sharpe. pp. 185-201 [Crossref] Hutchins, F. G. (2015). The illusion of permanence : British imperialism in India. Princeton University Press. [Crossref] Jahn, B. (2005). Kant, Mill, and Illiberal Legacies in International Affairs. International Organization, 59:1, pp. 177-207. [Crossref] Mill, J. S. (2001). The Principles of Political economy. Volume 1 of Ch 13 Consequences of Foregoing Laws. Batoche. [Crossref] Mill, J. S. (2001). The Principles of Political economy. Volume 2 of Ch 13 Remedies for Low Wages. Batoche. [Crossref] Mill, J. S. (2001). The Principles of Political economy. Volume 4 of Ch 5 Consequences of the Tendency of Profits to a Minimum . Batoche. [Crossref] Mill, J. S. (2001). The Principles of Political economy. Volume 5 of Ch 11 Of the Grounds and Limits of Laissez faire or Non-Interference Principle. Batoche. [Crossref] Sullivan, E. P. (1983). Liberalism and Imperialism: J. S. Mill's Defense of the British Empire.

Journal of the History of Ideas, 44:4, pp. 599-617. [Crossref] Tunick, M. (2006). Tolerant Imperialism: John Stuart Mill's Defense of British Rule in India. The Review of Politics, 68:4, pp. 586-611. [Crossref]

Analysing Dental Care in Canada

By Prattasha Bhuyan, Jiaxin Fang, Atharva Shirsat, Yin Lai Wang, and Marine Youm Written for ECON 408: Public Sector Economics I Edited by Ava Liang, Mariel Yacolca Maguiña, and Tahsin Kabir Etul

Abstract The debate about whether dental care should be included in Canada’s universal health care began in 1940. Dental care has not been included in the public system for a variety of reasons, with cost concerns being the most notable issue due to the majority of dental services being financed by private insurance. This paper will analyse the nearly universal dental care system in France and see how it compares to Canada, then explain the problems that arise from adverse selection. A rudimentary cost benefit analysis will also be conducted to provide a general picture of the impacts of a universal dental care system. Finally, the paper will discuss potential solutions to make the implementation pragmatic. Acknowledging the potential direct and indirect economic cost of such a program, we argue that the government should develop a universal dental care system along with specific prevention measures like water fluoridation.

I Introduction: Dental Care History in Canada The debate on whether dental care should be covered in the Canadian public health insurance can be traced back to the 1940s, when the Great Depression and World War II led to social unrest and the spread of diseases led to medical costs rising beyond the affordability of the provincial governments. In response, the federal government proposed a draft bill for health insurance in 1943. Dental care insurance was included in the bill at first, but the dominion-provincial conference on reconstruction argued that it should be publicly financed at a later stage since dental disease was not deadly, contagious, nor emergent.1 Moreover, World War II put Canada in debt and induced cost cutting; since dental disease was one of the most frequently occurring health problems, covering it would burden the public healthcare system.2 As a result, dental care became one of the first items that was cut from public health care service.3 In 1957, the federal government introduced the Hospital Insurance and Diagnostic Services Act, which focused on 1

Quiñonez, C. (2013). Why was dental care excluded from Canadian Medicare? Network for Canadian Oral Health Research Working Papers Series, 1(1): pp. 2 2 Quiñonez, C. (2013): pp. 3 3 Quiñonez, C. (2013): pp. 3

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providing a ½ reimbursement of provincial and territorial hospital and diagnostic service spending to the local governments. Medical services that were “universal, comprehensive, accessible, and portable” were qualified for the reimbursement, yet this did not include dentistry.4 The idea of bringing dental care into public health service re-emerged in the 1964 Royal Commission on Health Services. The commission proposed that the federal government should work with provincial and territorial governments to operate comprehensive, universal, provincial programmes of personal health services. Again, dentistry was made as a special case—the commission called for targeted rather than universal dental coverage for children, expectant mothers, and public assistance recipients.5 This decision was made due to the acknowledgement of a shortage of dentists at that time. The 1964 Royal Commission on Health Service prompted the adoption of the Canadian Health Act (CHA) in 1984 and shaped our current health system by establishing the publicly funded single-payer framework for the current Canadian healthcare system, which offers coverage for medically necessary physician and hospital services while excluding dental services.

II Current Canadian System The Canadian healthcare system is largely decentralised and publicly funded. While the federal government funds, researches, and regulates some aspects, the provinces are responsible for providing health care to their residents. Dental care is not covered by Medicare for most people; as a result, those who do not meet requirements for public coverage need private insurance to access dental health services. Although the federal and provincial government regulates the private insurance market, international standards find that Canada’s regulation on private insurance pricing and delivery of service is weak.6 There is some public coverage for Canadians, but it is limited; for instance, the federal government covers a portion of dental care for veterans, some Indigenous people, and refugees. The provincial government, on the other hand, covers portions for qualifying individuals based on their financial situation.7 For example, low-income residents of British Columbia may request financial aid for specific situations only, and Nova Scotia’s emergency dental care coverage for low-income individuals only covers 20% of the total cost.8 This conditional dental coverage ignores that in Canada, not everyone has a family doctor and some people are required to wait indefinitely at walk-in clinics, and that some dentists might 4

Manga, P., Broyles, R. W., & Angus, D. E. (1987). The determinants of hospital utilisation under a universal public insurance program in Canada. Medical care, 25(7), pp. 12 5 Quiñonez, C. (2013): pp. 2 6 Neumann, Daniela Garbin and Carlos Quiñonez. (2014). A comparative analysis of oral health care systems in the United States, United Kingdom, France, Canada, and Brazil. NCOHR Working Papers Series 2014 1:2, pp. 10 7 Neumann, Daniela Garbin and Carlos Quiñonez. (2014), pp. 10-11 8 Oral Health Roundtable. (n.d.). Emergency Dental Care for Income Assistance Recipients Program

Analysing Dental Care in Canada

charge an exam fee for the referral. The dental care system negatively affects marginalised groups who are unable to pay for private insurance and are neither covered publicly nor through their employers. Dental health is just as significant as other health problems, and dental disease could be cumulative over time with severity increasing with age.

III On the global scene: Comparing Canada with France The World Health Organisation finds that over 70% of the world population cannot access proper and affordable dental care.9 Compared internationally, Canada has relatively good accessibility to dental care. However, dental care is private in Canada and provided mainly through employment-based group insurance or individual private insurance.10 32% of all Canadians do not have dental insurance, including nearly half of all seniors and lower-income citizens.11 Furthermore, 1 out of 6 Canadians state they are unable to meet their dental health needs due to financial constraints.12 The privatisation of dental care generally affects low-wage, temporary and seasonal workers whose employment does not come with such health benefits.13 Also, in an era where the gig economy is substantially growing, it is concerning that ‘contractors’ (i.e. Uber drivers, Airbnb hosts, etc.) are not considered employees and are left out of health benefits traditionally provided by the employer.

In contrast, France has combined the private and public sector of health care to cover 99.9% of its population.14 The French social security services that cover health care (SHI) are financed through employer contributions and earmarked taxes, and this coverage includes nearly everyone: employed, unemployed, self-employed, retirees and seasonal/temporary workers. It covers not only basic general health care but also dental care, medical appliances, and prescription drugs. Yet, coverage for such services is not 100% and patients are still required to pay between 20% to 50% with SHI for this complementary care; private co-insurance on the other hand, may fully reimburse the patient.15 In order to regulate coverage costs, French dental professionals and SHI agree on set fees. France also imposes a mandatory examination for children aged 6 and 12 to detect and treat early off-sets of diseases and to educate children on the importance of dental hygiene.16 In the long 9

Canadian Dental Association (2017, March). The State of Oral Health in Canada, pp. 6 Neumann, Daniela Garbin and Carlos Quiñonez. (2014), pp. 10 11 Canadian Dental Association (2017): pp. 10 12 Canadian Dental Association (2017): pp. 11 13 Neumann, Daniela Garbin and Carlos Quiñonez. (2014), pp. 10 14 Neumann, Daniela Garbin and Carlos Quiñonez. (2014), pp. 7 15 Neumann, Daniela Garbin and Carlos Quiñonez. (2014), pp. 7-8 16 Neumann, Daniela Garbin and Carlos Quiñonez. (2014), pp. 8 10

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run, these preventative measures help avoid future complications and save money for the government and SHI. As such, France covers more citizens than Canada yet spends less overall.17 And while dental care is not entirely universal in France, it reduces inequality in access to dental care by acting as an insurer and by regulating prices. In Canada, eligibility conditions for dental care assistance can be strict—covering only 6.2% of all cases18—and largely ignores the needs of seniors. France’s system allows citizens to purchase additional coverage if they wish to, but ensures that all citizens have affordable access to baseline dental care. As a result, France has the highest number of visits to the dentist with an average of 74.9%.19

IV Analysis: Adverse selection Adverse selection is one of the primary economic bases for why Canada should consider the implementation of public dental care, and occurs due to asymmetric information, or when one party in a transaction is in possession of more information than the other. In the case of health insurance, the individual has more information about their own oral health than insurance companies. This means that the individual will only enter into a contract if it benefits them—almost always at the expense of the insurance company—thus creating adverse selection.

If dental insurance is not provided by the government to all of its population, the public will have no other choice but to go to private insurers. If this occurs, adverse selection will take place as private insurers may end up with applicants whose actual risk of going to a dentist is substantially higher than the risk known by the company. After all, only those who think they need dental insurance will seek it.

To combat this problem, insurance companies will use a system that identifies and quantifies the risk factors which could result in an increase or decrease in the risk level of an applicant, for example: age, medical condition, or consumption behaviour. Secondly, insurers will use a well-functioning system to verify if the information provided by the applicant is accurate. This is done by going through public records, financial statements, credit reports, pharmaceutical databases, and medical exams.20 Thirdly, the insurer will put a cap on the coverage, called the aggregate limits of liability, to reduce the insurer’s financial risk.21 If these actions are not taken there will be a vicious cycle. The insurer will pay out more than expected, hence, they will increase the premiums on coverage to compensate. This will result in more adverse selection as healthier people would not buy a more expensive coverage, leading to only at-risk people buying 17

See Appendix B. Canadian Dental Association (2017): pp. 13 19 Canadian Dental Association (2017): pp. 7 20 Huddleston, C. (2021, May 20). How life insurance companies get Intel on you. Forbes 21 Maverick, J. B. (2021, December 8). Examples of adverse selection in the insurance industry. Investopedia 18

Analysing Dental Care in Canada

it. This then compels the insurer to increase premiums in the future, as the insurer cannot spread the fixed costs across fewer policy holders. Eventually, the insurer goes out of business as the premiums become so high that no one can afford them or is willing to pay them.

Due to the above reasons, the insurer decides not to sell health insurance to individuals who pose a high risk or charges them a higher premium. This negatively affects high risk individuals from low-income families, leading them to not buy coverage and suffer from bad health or to buy coverage and have increased financial stress. A study by the Canadian Dental Association found that Canadians with poorer self-assessed oral health and those over 65 years of age were less likely to be insured, and there was a 19% drop in dental care received by individuals with self-assessed poor oral health relative to those who reported excellent oral health.22 The research also stated that individuals with household income of $80,000 or more were 25% more likely to receive dental care than otherwise comparable individuals with an annual income of less than $15,000.23 This validates the negative impact on certain at-risk, low-income populations of the actions taken by insurance companies to combat adverse selection.

In order to promote higher social well-being and to avoid the expensive and non-comprehensive coverage which results from adverse selection, the government should provide universal dental coverage. If the government provides universal dental insurance, it will correct the market failure resulting from adverse selection and lead to a reduction in premium prices or even eliminate premium prices altogether. The government could provide provincially-based universal dental insurance similar to Medicare by making dental insurance a publicly funded and single-payer system with a private dental services delivery. The government could also follow France’s system where dental services are included in health insurance and the fees or salaries of dental professionals are regulated.

V Cost-Benefit Analysis of Universal Dental Care Plan Cost benefit analysis (CBA) is used to compare the projected or estimated costs associated with a project or a decision versus the benefits that it brings to ascertain whether it makes sense to proceed with the project’s implementation. Due to knowledge, resource, and research limitations, only an estimation of the CBA is possible; further, not all aspects can be relegated to a clear monetary value.

The cost is estimated by a report published by the office of the parliamentary budget officer in 2020, which analysed the cost of establishing a Federal dental care program for uninsured 22 23

Grootendorst, P. (n.d.). Dental Insurance, income and the use of dental care in Canada, pp. 1 Grootendorst, P. (n.d.), pp. 4

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Canadians. The report concluded that the government will initially have to pay a one-time upfront cost of around $3 billion to cover the treatment cost of untreated caries in the eligible population on top of the annual average cost.24 Then, costs are projected to stabilise at around $1.6 billion on average, including administration costs.25 A second potential cost is the loss of the private dental insurance market. Indeed, private companies that specialised in or provided dental coverage will lose business, which can create some unemployment and government corporate tax revenue loss. Another indirect cost may be a longer wait time to get care due to increased demand for the “free” dental service, similar to the wait time with universal healthcare.

On the benefit side, the prevention of potential cost is the selling point. Studies find that in Ontario, between 2006 and 2007, approximately 26,000 Ontarians received $16.4 millions worth of emergency department (ED), hospital, and/or physician care for dental conditions that are normally best treated in dental care settings.26 In British Columbia, the cost of such visits at 29 of 79 EDs was $1.53 million a year or about 1% of all ED costs at participating hospitals. In Alberta, the estimated direct cost of ED management of a dental problem not associated with trauma (DPNAT), excluding hospital admission, is $4.2–6.3 million a year.27 This total cost associated with inefficient use of ED for non-emergency dental care could have been either prevented or at least mitigated with universal dental coverage.

Another benefit is that employers and private firms won’t have to cover their employees anymore. It may seem like a simple cost transfer from the firm to the government, but it’s possible that there is still gain by the fact that the total cost to the government may be lower than the total cost of all the firm's individual dental plans. One reason for this is that the government, being the sole purchaser of dental care, can negotiate a lower service fee due to its monopolistic market power. In other words, dental firms can only mostly sell to the government, but the government can shop around for different sellers. Other non-financial factors that have economic benefit and create positive externalities to the individual and to society are increases to the quality of life and personal and economic productivity28, or reductions in work or school hours missed due to dental problems. Good oral health leads to positive externalities for society.

24

See Appendix C. Giroux, Y. Office of the parliamentary budget officer (2020, Oct 7). Cost Estimate Of a Federal Dental Care Program For Uninsured Canadians 26 Quiñonez, C. Ieraci,L. and Guttmann,A (2011, August). Potentially Preventable Hospital Use for Dental Conditions: Implications for Expanding Dental Coverage for Low Income Populations. Journal of Health Care for the Poor and Underserved, 22(3), pp. 1051 27 VanMalsen, J. R., Figueiredo, R., Rabie, H., &amp; Compton, S. B. (2019, March 29). Factors associated with emergency department use for non-traumatic dental problems: Scoping review. jcda 28 See Appendix D. 25

Analysing Dental Care in Canada

VI Solutions The government should apply preventative methods along with the universal dental care plan to minimise costs, because if dental health problems are prevented from the outset the government could spend less treating them in the future. One of the most cost-saving and effective prevention measures is introducing community water fluoridation. Fluoridation has been known to prevent tooth decay and causes no harm to the environment.29 Because fluoridated water is non-rival and non-excludable, its implementation will help alleviate inequality by benefitting the whole community regardless of their socio-economic status. This public good is cost saving even if we take into account the implementation and maintenance costs. It is estimated that $1,000 of investment in community water fluoridation could save up to $38,000 in the cost of dental treatments.30 Since excess sugar consumption has been known to contribute to various chronic diseases and dental caries,31 another preventative method could be levying tax on products that are unhealthy for oral health (i.e. soda, sugar candies, coffee). A study conducted in Mexico argued that tax implementations on soft drinks and nutritionally deficient foods have successfully reduced the consumption level on unhealthy foods.32 The United States has shown that taxes on sugar-sweetened beverages that increase prices by 20% can contribute to about a 20% decrease in consumption.33 It is estimated that a tax on soft drinks of 1 cent per ounce over 10 years would save greater than $17 billion US dollars in health care expenses. In fact, this tax could bring in about $13 billion US dollars in annual tax revenues.

To apply this, Canada can start with a 20% tax on sugary drinks and observe the consumption patterns of consumers and tax revenues for a year. Then they can gradually increase the tax rate over time, depending on initial reception. In addition to taxation on sugar consumption, an increase in sales tax for alcohol or tobacco should also be considered. These goods are considered inelastic because they contain addictive chemicals which make users seek these products no matter the cost.34 When taxes on these products increase, producers can pass the higher costs on to consumers. Since consumers’ demand for these specific products is very inelastic, they are willing to pay the extra taxes and consequently will increase tax revenue.35

29

Canadian Academy of Health Sciences (2014). Access to oral care final report, pp. 52 Canadian Academy of Health Sciences (2014), pp. 52 31 Canadian Paediatric Society (2020). A proposal to increase taxes on sugar-sweetened beverages in Canada 32 Hernández-F, M., Cantoral, A., & Colchero, M. A. (2021, April 14). Taxes to unhealthy food and beverages and oral health in Mexico: An observational study. Caries Research 33 World Health Organisation (2017) 34 Greenlaw, S. A., & Shapiro, D. (2017, January 12). Elasticity and pricing. Principles of Economics 2e 35 Greenlaw, S. A., & Shapiro, D. (2017) 30

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Furthermore, the government can borrow money by issuing government bonds to lenders such as corporations, companies and individuals.36 Treasury bills are a short term federal government bond that has no interest rate but compensates by initially selling at a discount. In general, this type of government bond attracts investors because there is such a low possibility of default.

Governments will always be able to flexibly raise taxes to pay off the debts they owe. Such short term securities are very liquid; they are actively traded in the money market and have small fluctuations in prices which attract more investors. In this way, the government will be able to raise funds to spend on new or existing programs that would contribute to an increase in overall oral health.

VII Conclusion While certain Indigenous people, children, and a fraction of low income citizens may be eligible for government issued dental insurance, other socioeconomic marginalised groups and unemployed people still remain uninsured in Canada. This failure of the private dental insurance industry can be attributed to adverse selection. The actions taken by the insurance companies to minimise adverse selection risk leads to vulnerable populations in Canada being completely uninsured for dental insurance or being financially stressed by high premiums. We weighed the cost and benefit of universal dental coverage using a CBA, determining the implementation of universal dental coverage will impose a direct cost to the federal government annually, while the benefits exist in prevention cost saving from emergency use due to dental problems as well as to employers who won’t have to provide coverage anymore. Solutions proposed to combat this heavy cost are to introduce water fluoridation in drinking water, to levy tax on products that lead to oral health problems, and to borrow by issuing bonds to be repaid later. The conclusion we arrived at was that to increase the well-being of society and to correct market failure arising from adverse selection, the government should provide universal dental insurance.

36

Mishkin, F. S. (2010). The economics of money, banking, and Financial Markets. Pearson. Oral Health Roundtable. (n.d.)

Analysing Dental Care in Canada

IX Appendices Appendix A

Percentage of Canadians Aged 12 and Over that Consulted with a Dentist or Orthodontist in Canada in 201237 Appendix B

Oral health care expenditure and sources of financing, Brazil and selected countries, 201038 37

Source: Statistics Canada, Canadian Community Health Survey (CCHS), 2012 Sources: CMS [24]; OECD [27]; Kravitz & Treasure [35]; Blackburn [36]; Office of Fair Trading [37]; Brazil [62]; ANS [63]; and IBGE [66].

38

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Appendix C

Cost of care ($ Millions) for the federal government annually for a universal dental coverage39

Appendix D

Why Access to Healthcare Matters40

39 40

Office of the Parliamentary Budget Officer Dr Ling Ling Zhang, Lecture Slides ECON408 (Asymmetric Information)

Analysing Dental Care in Canada

VIII References Adverse Selection. (2021, January 19). Investopedia. Retrieved November 26, from: https://www.investopedia.com/terms/a/adverseselection.asp Canadian Academy of Health Sciences (2014). Access to oral care final report. Retrieved November 26, 2021, from: https://www.cahs-acss.ca/wp-content/uploads/2015/07/Access_to_Oral_Care_FINAL _REPORT_EN.pdf Canadian Dental Association (2017, March). The State of Oral Health in Canada. Retrieved from: https://www.cda-adc.ca/stateoforalhealth/_files/TheStateofOralHealthinCanada.pdf Canadian Paediatric Society (2020). A proposal to increase taxes on sugar-sweetened beverages in Canada. Retrieved December 9, 2021, from: https://cps.ca/documents/position/tax-on-sugar-sweetened-beverage Dental Health Services in Canada. The State of Oral Health. (n.d.). Retrieved November 26, 2021, from: https://www.cda-adc.ca/stateoforalhealth/servicescanada/.

Giroux , Y. Office of the parliamentary budget officer (2020, Oct 7). Cost Estimate Of a Federal Dental Care Program For Uninsured Canadians. Retrieved, 26 Nov 2021, from: https://www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/RP-2021-028-M/RP-20 21-028-M_en.pdf Greenlaw, S. A., & Shapiro, D. (2017, January 12). Elasticity and pricing. Principles of Economics 2e. Retrieved December 9, 2021, from: https://opentextbc.ca/principlesofeconomics2eopenstax/chapter/elasticity-and-pricing/ Grootendorst, P. (n.d.). Dental Insurance, income and the use of dental care in Canada.

Retrieved November 26, 2021, from: https://cda-adc.ca/jadc/vol-73/issue-1/57.pdf.

Hernández-F, M., Cantoral, A., & Colchero, M. A. (2021, April 14). Taxes to unhealthy food and beverages and oral health in Mexico: An observational study. Caries Research.

Retrieved December 9, 2021, from https://www.karger.com/Article/FullText/515223.

Huddleston, C. (2021, May 20). How life insurance companies get Intel on you. Forbes.

Retrieved from: https://www.forbes.com/advisor/life-insurance/personal-data/.

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Manga, P., Broyles, R. W., & Angus, D. E. (1987). The determinants of hospital utilisation under a universal public insurance program in Canada. Medical care, 25(7), 658–670.

Retrieved from:https://doi.org/10.1097/00005650-198707000-00009 Maverick, J. B. (2021, December 8). Examples of adverse selection in the insurance industry.

Investopedia. Retrieved from: https://www.investopedia.com/articles/insurance/082516/examples-adverse-selection-i nsurance-industry.asp.

Mishkin, F. S. (2010). The economics of money, banking, and Financial Markets. Pearson.

Oral Health Roundtable. (n.d.). Medical Services Plan of B.C. Retrieved from: http://www.oralhealthroundtable.ca/medical-services-plan-of-bc Neumann, Daniela Garbin and Carlos Quiñonez. (2014). A comparative analysis of oral health care systems in the United States, United Kingdom, France, Canada, and Brazil. NCOHR Working Papers Series 2014 1:2. http://www.ncohr-rcrsb.ca/knowledge-sharing/working-paper-series/content/garbinneu mann.pdf Oral Health Roundtable. (n.d.). Emergency Dental Care for Income Assistance Recipients Program. Retrieved from: http://www.oralhealthroundtable.ca/employment-support-and-income-assistance-dent al-program Price, S. (2021, August 6). What Is Adverse Selection in Health Insurance?

ValuePenguin. Retrieved from: https://www.valuepenguin.com/adverseselection-health-insurance Quiñonez, C. Ieraci, L. and Guttmann, A (2011, August). Potentially Preventable Hospital Use for Dental Conditions: Implications for Expanding Dental Coverage for Low Income Populations. Journal of Health Care for the Poor and Underserved, 22(3), pp.1048-1058.

Quiñonez, C. (2013). Why was dental care excluded from Canadian Medicare? Network for Canadian Oral Health Research Working Papers Series, 1(1), 1-5.]. http://www.ncohr-rcrsb.ca/knowledge-sharing/working-paper-series/content/quinonez. pdf

Analysing Dental Care in Canada

VanMalsen, J. R., Figueiredo, R., Rabie, H., &amp; Compton, S. B. (2019, March 29).

Factors associated with emergency department use for non-traumatic dental problems: Scoping review. jcda. Retrieved from:https://jcda.ca/j3.

World Health Organisation (2017). Retrieved December 9, 2021, Retrieved From: https://apps.who.int/iris/bitstream/handle/10665/260253/WHO-NMH-PND-16.5Rev.1 -eng.pdf;sequence=1.

Zivkovic, N., Aldossri, M., Gomaa, N., Farmer, J. W., Singhal, S., Quiñonez, C., & Ravaghi, V. (2021, March 12). Providing dental insurance can positively impact Oral Health outcomes in Ontario . BMC Health Services Research. https:// bmchealthservres.biomedcentral.com/articles/10.1186/s12913-020-49 67-3

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Urbanisation in China: A Case study on Economic and Technical Development Zones, Shenzhen

By Kelly Yeung Written for ECON 314: Economic Development II Edited by Molly Flanagan, Mariel Yacolca Maguiña, and Caleb Sansom

I Introduction This paper argues that the opening up of the economy to foreign direct investment (FDI) resulted in the rapid urbanisation of China. Rural to urban migration in Chinese cities was prompted by the government’s goal of soliciting foreign investment in domestic infrastructure and industrial projects, which created a new manufacturing sector and increased demand for labour. After abandoning its former Import Substitution Industrialization policy in the 1970s and shifting to an export-oriented strategy, China became a member of the World Trade Organisation (WTO) and joined economic organisations such as the Organisation for Economic Cooperation and Development (OECD). China also worked on expanding its government investment into coastal regions to launch new Economic and Technical Development Zones (ETDZs). Due to their geographical location and historical and cultural heritage, coastal areas such as Guangdong, Fujian, and Shanghai experienced the fastest growth during this transition period. A close examination on the development of special economic zones and its tremendous effect on rural-urban immigration in coastal areas is conducted, specifically in the city of Shenzhen.

II Urbanisation With constant advances in research and development, the increased possibilities in urban areas compared to rural ones has influenced the significant agglomeration of China’s population in the urban sector. According to the latest estimate and projection released by the Population Division of the United Nations, the world's urban population continues to grow at a higher rate than the gross global population, and 3 billion people—approximately 48% of the world population—are now city dwellers1. Urbanisation is advancing rapidly in less developed regions and urban population is forecasted to grow an average 2.3% per year between 2000 and 2030 in the developing world. Almost all of the world's total population growth in this period is expected to be absorbed by urban areas in less developed regions, as seen in Appendix A.2 1

“Urban and Rural Population Growth and World Urbanisation Prospects,” World Urbanisation Prospects: The 2018 Revision, 2019, pp. 9-31 2 Jie Chen, “Rapid Urbanisation in China: A Real Challenge to Soil Protection and Food Security,” CATENA (Elsevier, June 19, 2006)

Urbanisation in China: A Case study on Economic and Technical Development Zones, Shenzhen

The means of urbanisation can be described as a transition from a rural population, where agriculture is the primary economic focus, to a denser urban society, where the main focus is industrial and manufacturing sectors.3 Historically, the process of urbanisation has been linked to economic development; cities generate and foster more growth and employment than rural settlements by utilising the power produced by industrialization and agglomeration. In particular, cities are centres for innovation, culture, commerce, and sustainable development. Due to its attractive nature, an increased urban population due to rural-urban migration can face consequences, including increased poverty, inequality, declining infrastructure, rising pollution, lack of funds, increased food insecurity, shortage of adequate housing, and difficulty provisioning urban services. Therefore, efficient urban planning and management practices are essential to counteracting the detrimental impacts of a growing population of city dwellers.

With the enticing benefits of cities, economic development has helped build the structural shift out of agriculture and towards an industrial service-based economy. External economies of scale in manufacturing and services are believed to draw workers and firms into urban areas, which in turn stimulates population growth. This leads to industrialization, promotes urbanisation, and leads to the agglomeration of economic activity, where economic actors relocate to benefit from higher wages, improved infrastructure and higher employment rates.4 This paper proposes this is the case for the special development of economic coastal regions in China.

III The Chinese Economy in the Second Half of the 20th Century With the era of the reform period starting in 1978, the rate of urbanisation and industrialization accelerated at a remarkable speed in China. Urban population had expanded rapidly and the level of urbanisation doubled to 36% in 2000, and China surpassed the United States in the mid-1970s to become the nation with the largest number of urban dwellers in the world (see Appendix B).

Although China is still considered a predominantly rural country with an urbanisation rate just under 20%, in absolute numbers China has become the world’s largest urban nation in human history—in just 30 years. Ironically, this ascendance occurred at the end of a period in which China’s public policy was profoundly anti-urban. China’s ‘opening up,’ and the introduction of market-oriented reforms in the early 1980s, accelerated urbanisation across China such that today 600 million urban Chinese constitute 44% of the country’s population.5 3

R. Mark Montgomery and others, eds. Cities Transformed: Demographic Change and its Implications in the Developing World. Earthscan, 2004 4 Michael P. Todaro and Stephen C. Smith. Economic Development. 12th ed. Harlow: Pearson Education, 2015: 336 and 339 5 United Nations, Population Division of Department of Economic and Social Affairs, World Urbanisation Prospects: The 2007 Revision (Key Facts) (New York: United Nations, 2007)

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By making a comparison to the pre-reform period, three significant changes can be identified.

First, the strict controls over urban growth gradually began to loosen. For example, after people’s communes were dissolved in the early 1980s, food rationing and job allocation became less effectively regulated. In the 1990s, high-rate flows of rural-urban migration were common in all cities, especially large coastal areas like Shanghai, Beijing and Guangzhou.6 A second factor is that coastal areas became the main focus of urban growth, and have received significant favourable treatment. Since the economic reforms began in 1978, cities have again been coined as centres of regional and national development, and coastal areas where most large cities are located were recognized as the most promising growth regions. Preferential policies were offered, including fiscal incentives, administrative autonomy, special economic zones, and open development areas to attract foreign capital.7 Furthermore, external factors, especially foreign direct investment (FDI), have played an increasingly important role in shaping urbanisation and regional growth. China has become the largest recipient of FDI in the developing world and the second-largest among all nations (exceeded only by the US). FDI seems to have enhanced China's urban growth in a unique manner; due to abundant underpaid labour and the export orientation of the FDIs strategy, most foreign investment in China is associated with export-processing and export-assembling plants in manufacturing sectors that are intensive in unskilled labour, which in turn highly influences rural-urban migration due to the increased job opportunities in the manufacturing sector. 8

IV Case study - Special Economic Zone - Shenzhen Rapid economic and demographic growth launched the small-scale coastal town of Shenzhen—which is in close proximity to Hong Kong—into one of the most dynamic and modern-looking cities in China.9 After a change in national leadership in the late 1970s, China decided to open up its economy to attract overseas capital and technology for internal economic growth. The Chinese Government in 1980 set up Special Economic Zones (Shenzhen, Zhuhai and Shantou in Guangdong province, and Xiamen in Fujian province) in four cities along its southern coast. The Shenzhen special economic zone is the largest of the four Special Economic Zones (SEZs) and has undergone the most rapid economic and demographic growth. Its gross industrial output in 1979 rose from 4 million Chinese yuan (1 USD = 1.5 yuan in 1979) the year before SEZs were formally established to 30 million yuan in 1985. Revenue income for the 6

Kevin Honglin Zhang, “What Explains China's Rising Urbanisation in the Reform Era?,” Urban Studies 39, no. 12 (2002): pp. 2301 7 Zhang (2002): pp. 2302 8 Lucian W. Pye and Nicholas R. Lardy, “Integrating China into the Global Economy,” Foreign Affairs 81, no. 3 (2002): p. 176 9 Chen, Xiangming. (1987). Magic and myth of migration: a case study of a Special Economic Zone in China.

Asia-Pacific population journal / United Nations. 2. 57-76

Urbanisation in China: A Case study on Economic and Technical Development Zones, Shenzhen

Shenzhen SEZ reached 8.6 million yuan in 1985, a 14-fold increase since 1979. Additionally, Shenzhen’s population rose from about 30,000 in 1978 to nearly 350,000 in 1984.10 The SEZs were designed with four main goals in mind: to bring in foreign capital and advanced technology, absorb scientific knowledge from the outside world, introduce and mobilise modern management expertise, and articulate China’s new foreign economic policy.11 Shenzhen was too small to grow into a city of the industrial and economic magnitude and complexity that would enable it to compete with cities such as Shanghai and Tianjin. China decided in 1984 to establish Economic Development Zones (EDZs) in 14 cities along the coast. The initially greater size and stronger industrial capacity of those cities as compared with Shenzhen qualify them to be real growth core centres as instruments of national spatial policy.12 Unexpectedly, Shenzhen represented an unconventional urbanisation strategy. On the one hand, it did not have the basic economic and demographic structure to become a metropolis, even with special assistance from the government. On the other hand, Shenzhen’s population characteristics and favourable location directly across from Hong Kong (Appendix C) were conducive to its growth into a sizable city.13 The strategic geographical location of Shenzhen aided the city to become one of the largest urban areas in today’s world.

V Employment and Migration With the development and investment of Shenzhen’s economic zone, the rate of formal employment rose tremendously. Substantial investment in basic construction and development, coupled with government publicity about the rising importance of the SEZs, had created a new image of Shenzhen as a “promising land.” People were attracted to new job opportunities occurring in an environment consisting of favourable conditions: emerging economic prosperity, freer political atmosphere, warm weather, and proximity to Hong Kong, which at the time was under British rule. Thousands of people began to gain interest in seeking new careers and living opportunities in Shenzhen, resulting in the unprecedented migration of people from different parts of China to the southern city. Appendix E presents data on the rapid population growth of Shenzhen over a six-year span. As Table 1 suggests, the population in the Shenzhen SEZ increased sharply from 1979 through 1984, with a net increase of 120,500 people (1.7x) in six years.

10

Douglas Zhihua Zeng, “Experience with Special Economic Zones and Industrial Clusters ,” World Bank, 2010 Mattei Dogan and John D Kasarda, “Giant Cities of the Urban Hierarchy in China: A Persisting Dilemma and a Promising Solution.,” The Metropolis Era 17 (1990): pp. 209-213 12 Dogan, Kasarda (1990): pp. 215 13 Robert Kleinberg, “Opening Up and Local Development in Shenzhen Special Economic Zone,” China's "Opening" to the Outside World, November 2019, pp. 47-70 11

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Migration to the Shenzhen SEZ accounted for more than 90% of the population growth except for 1981 (Table 1, Row 10). These percentages display the inflow of a minimum of 20,000 new inhabitants on average each year into an area of 327.5 sq. km.14 This rate was considerably higher than rates of rural migration to large cities (30-60%) in several developing countries where migration flows have largely been unchecked.15

VI Positive and negative effects of urbanisation in Shenzhen Population growth in Shenzhen tended to run ahead of the new and emerging infrastructure of the city. For example, the shortage of public toilets caused a series of complaints, which made the headlines of the local newspaper. The living conditions of a growing temporary population in Shenzhen were another concern. In particular, many construction workers lived in wooden shacks that lacked convenient and sanitary facilities. Shenzhen’s rising trade and high consumption also attracted a substantial number of people in business, some of whom took advantage of the SEZs flexible policies to engage in smuggling and illegal trading practices.16 A major effort to impose population regulation and control began early in 1986, which aimed to disperse illegal residents without ‘temporary residency cards.’ A ‘control’ line (a wire fence stretching 84 km and an 86.2-km patrol road) was put into use on April 1, 1986. Although the State intended the line to prevent smuggling and illegal economic activities, it equally served to inspect and dissuade people that tried to enter without visas and identification cards.

Shenzhen SEZ’s long-term plan allows its population to grow only to 450,000 by 1990 and to 800,000 by 2000 (Shenzhen SEZ Yearbook, 1985). This implies an annual growth rate of 15.3% to 1990 and 5.9% to 2000 [calculating on the basis of 450,000 in 1990]. The rationale behind this planned population growth is that Shenzhen’s economic system, dynamic as it is, is only capable of bearing a finite population. Therefore, it is understandable to be concerned about Shenzhen degenerating from a ‘gold town’ to a ‘ghost town’ if unchecked population inflow and an overheated economy eventually exhaust all the ‘gold.’17 From a small fishing town to a global technological centre, Shenzhen’s GDP in terms of urban industrial and economic development rose from 196 million yuan in 1979 to more than 2.2 trillion yuan, increasing 2,152-fold over 38 years with an average annual growth rate of 22.4 %.

During the same period, GDP per capita grew from 606 yuan to 183,100 yuan, an increase of 14

Shenzhen Statistical Yearbook (Beijing: China Statistics Press, 1985) “Urban and Rural Population Growth and World Urbanisation Prospects,” World Urbanisation Prospects: The 2018 Revision, 2019, pp. 9-31 16 Zhang (2002): pp. 74 17 Zhang (2002): pp. 76 15

Urbanisation in China: A Case study on Economic and Technical Development Zones, Shenzhen

56.3 times with an average annual growth rate of 11.2 per cent. In 2018, Shenzhen’s GDP hit 2.42 trillion yuan, overtaking Hong Kong for the first time. From 1979 to 2017, Shenzhen’s total export volume grew from $9.3 million to $244.221 billion, up by 9,565-fold with an annual growth rate of 27.3% over the last 38 years. In 1978, Shenzhen was a small traditional agricultural and fishing town. In 1979, it started to engage in processing and small production trades such as processing materials or assembling components given samples.18 Shenzhen’s urbanisation and GDP per capita rate have grown together simultaneously.

VII Conclusion In conclusion, opening up the economy to foreign direct investment in the special economic zones allowed Shenzhen to achieve a strong core economy and resulted in its high level of urbanisation. Shenzhen’s population and land growth were highly planned and invested in by the Chinese government, and their concentration of export-processing activity led to its future success. The data presented shows Shenzhen’s outstanding manufacturing sector as it provided employment to recent rural migrants, paid relatively high wages compared to the rest of the country, and significantly contributed to the country’s economic output. Despite the impacts to the city, such as the high influx population and increased insecurity of the allocation of sufficient resources, it is nevertheless a persuasive example of the positive forces of agglomeration and industrialization on the urbanisation process.

18

Marco Kamiya et al., The Story of Shenzhen ( Nairobi : United Nations Human Settlements Programme, 2019)

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VII Appendices Appendix A

Estimation and projection of the world's urban and rural populations, 1950–203019 Appendix B

Urbanisation level between China, EU, OECD, USA and the world20 19

Jie Chen, “Rapid Urbanisation in China: A Real Challenge to Soil Protection and Food Security,” CATENA (Elsevier, June 19, 2006) 20 Lv, Yulan, Wei Chen, and Jianquan Cheng. “Modelling Dynamic Impacts of Urbanisation on Disaggregated Energy Consumption in China: A Spatial Durbin Modelling and Decomposition Approach.” Energy Policy. Elsevier, August 18, 2019.

Urbanisation in China: A Case study on Economic and Technical Development Zones, Shenzhen

Appendix C

Map: Location of Shenzhen Special Economic Zone21

21

Chen, Xiangming. (1987). Magic and myth of migration: a case study of a Special Economic Zone in China. Asia-Pacific population journal / United Nations. 2. 57-76.

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Appendix D

Shenzhen’s GDP and growth rate over the last 40 years22 Appendix E

Total and working population growth in Shenzhen Special Economic zone (1979-1984)23

22 23

Marco Kamiya et al., The Story of Shenzhen ( Nairobi : United Nations Human Settlements Programme, 2019).

Yang, Xinhong, and Zuozheng Xie. Shenzhen Statistical Yearbook. Beijing: China Statistics Press , 1985.

Urbanisation in China: A Case study on Economic and Technical Development Zones, Shenzhen

IX References Brockerhoff, Martin P. “An Urbanising World - Population Reference Bureau.”

Accessed November 13, 2020. https://www.prb.org/wp-content/uploads/2000/09/ACFAC3F.pdf.

Chen, Jie. “Rapid Urbanisation in China: A Real Challenge to Soil Protection and Food Security.” CATENA. Elsevier, June 19, 2006. https://doi.org/10.1016/j.catena.2006.04.019.

Chen, Xiang Ming. “(PDF) Magic and Myth of Migration: a Case Study of a Special Economic Zone in China.” ResearchGate, October 1987. https://www.researchgate.net/publication/11141287_Magic_and_myth_of_migration_a_c ase_study_of_a_Special_Economic_Zone_in_China.

Dogan, Mattei, and John D Kasarda. “Giant Cities of the Urban Hierarchy in China: A Persisting Dilemma and a Promising Solution.” The Metropolis Era 17 (1990): 209– 13. https://doi.org/10.1017/s0963926800014541.

Kamiya, Marco, Pengfei Ni, Aloysius C Mosha, Jie Tang, Raffaele Scuderi, Werner Lang, Shi Yin, and Dong Wang. The Story of Shenzhen. Nairobi : United Nations Human Settlements Programme, 2019.

Kleinberg, Robert. “Opening Up and Local Development in Shenzhen Special Economic Zone.”

China's "Opening" to the Outside World, 2019, 47–70. https://doi.org/10.4324/9780429044458-3.

Lv, Yulan, Wei Chen, and Jianquan Cheng. “Modelling Dynamic Impacts of Urbanisation on Disaggregated Energy Consumption in China: A Spatial Durbin Modelling and Decomposition Approach.” Energy Policy. Elsevier, August 18, 2019. https://doi.org/10.1016/j.enpol.2019.06.049 Majid, Nomaan. “The Great Employment Transformation In China.” Human Rights Documents Online, 2015. https://doi.org/10.1163/2210-7975_hrd-4022-2015059.

Pye, Lucian W., and Nicholas R. Lardy. “Integrating China into the Global Economy.” Foreign Affairs 81, no. 3 (2002): 176. https://doi.org/10.2307/20033216.

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Social Policy and Population Section, Social Development Division, ESCAP. “Asia-Pacific Population Journal Volume 2.” Asia-Pacific Population Journal Volume 2 | United Nations ESCAP, 1986. https://www.unescap.org/publications/asia-pacific-population-journal-volume-2 .

United Nations. Population Division of the Department of Economic and Social Affairs. World Urbanisation Prospects: The 2007 Revision (Key Facts). New York: United Nations, 2007. 1. Accessed November 10, 2020. https://esa.un.org/unpd/wup/Publications/Files/WUP2018-KeyFacts.pdf.

“Urban and Rural Population Growth and World Urbanisation Prospects.” World Urbanisation Prospects: The 2018 Revision, 2019, 9–31. https://doi.org/10.18356/cd4eece8-en.

Yang, Xinhong, and Zuozheng Xie. Shenzhen Statistical Yearbook. Beijing: China Statistics Press , 1985.

Zhang, Kevin Honglin. “What Explains China's Rising Urbanisation in the Reform Era?” Urban Studies 39, no. 12 (2002): 2301–15. https://doi.org/10.1080/0042098022000033881.

Zeng, Douglas Zhihua. “Experience with Special Economic Zones and Industrial Clusters .”

World Bank, 2010. http://documents1.worldbank.org/curated/en/294021468213279589/ pdf/564470PUB0buil 10Box349496B01PUBLIC1.pdf.

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