Question

1. Neoclassical economists’ champion unfettered markets (free from government intervention). What explains these strong free market convictions, and why do critics feel they are ill-founded?

2. Why is the practice of environmental valuation being criticized for potentially undervaluing nature? Is it better to have, albeit imperfect, environmental values as opposed to having no environmental values at all?

3.What is meant by discounting? By way of example explain why critics of discounting regard the practice to run counter to the principle of inter-generational equity.

Answer 1

Neoclassical economist believe in the idea of free market and how market forces of demand and supply will interact to reach an equilibrium. They are different form classical economists who believe that the price are set by the input costs and there are no economic profit. Meoclassical believe that the driving force behind price of a commodity is the consumer's perception about the product that he/she develops through its utility. The major assumption in neoclassical world is that the consumer is rational. The utilitysatisfaction derived from a product allows firms to charge price higher than the cost of production allowing them to earn economic profit. The school of thought believes that saving will always be equal to investment and the role of the government should only be to ensure full employment level of output. However, the neoclassical school of thought has been criticized on the basis that it overemphasizes on the rationality of the consumer. When rationality assumption fails, it leads to market failure and therefore, government intervention is needed to correct for the market failures. Example: The financial crisis of 2008 where housing market was perceived to be a profitable venture that led to high demand in housing, sub-prime lending. This created a housing price bubble which eventually burst and led to the crisis. Government and central bank had to intervene in order to bring the economy from the crisis.