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Question 1:

Intergenerational mobility is measured using intergenerational elasticity. The higher

the elasticity the higher the harder it is for a person to move outside of the income
class they were born into. In summary this means the rich are very likely to have
children that will grow up to be rich and poor will likely have children that grow up to
be poor. The Swedish intergenerational elasticity is quite low, indicating a positive
future prospect, which makes me question their concern. In my opinion I don’t
believe any policy should be implemented. There are, however, some policies the
Swedish government can conduct to further lower their elasticity. One of some
policies may include increasing quality and provision of education. If the education
system in place is extremely good, the poorer children have a better chance of
getting higher paying jobs as they will have the necessary skills and knowledge.
Another policy could be just implementing/refining an inheritance tax. This will
reduce intergenerational transmission, limiting the parental wealth one could inherit. I
really do not think further action is required in this situation and even though these
policies are available, I don’t think they need to be implemented. If they want to
increase elasticity, which I am not sure why they would want to do, they can simply
just do the opposite of the policies stated above.

Question 2:

Firm A has a lower marginal private cost of abatement (MPCA) than firm B. In this
case firm A will abate more than they have to as abatement is not as costly for them
as firm B. As the price of permits is equal to the marginal cost of abatement, and firm
B have a higher MC, firm A will benefit from selling their permits, as they will make a
profit that way, until their MPCA is equal to the MPCA of firm B. Even though both
firms initially had to abate the same amount, through trading permits Firm A will
abate more than firm B. All in all, both firms will benefit from buying/selling permits
until MPCA is equalized across firms, and the price of the permits will be equal to the
marginal cost of abating (under a pareto efficient outcome). Cap and trade policies
are cost effective, minimizing aggregate cost of reducing pollution, and it provides
the private sector with the flexibility to negotiate with each other on who should
pollute how much, while keeping total carbon emissions under that cap. As initial
carbon permits are free “grandfathering,” it doesn’t discourage new manufacturing
investors, that will have low carbon emissions, from entering the market.

Question 3:

Thomas Picketty describes wealth inequality as a steeply increasing function of r-g.

This basically says wealth inequality increases as r-g increases. We know for r-g to
increase overtime r must be greater than g (r>g). Making sense of this we can see
that if the initial wealth holders are getting a higher rate of return on their already
existent capital (r), than the growth rate of output (g): the wealthy are getting
wealthier faster than the rest of the economy, which is the definition of inequality in
the first place. For example, with r being 10% and g being 2% the wealth holders will
only need to reinvest 1/5th of their capital income so as to ensure that their wealth
rises as fast as national income. So, we have established wealth inequality is an
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increasing function in r-g, therefore if r>g; r-g is increasing; wealth inequality is

increasing.

Question 4 (a):

The equilibrium level of employment in this economy is when the price setting curve
intersects the wage setting, providing us the Nash equilibrium. Here the firms are
offering workers a wage that ensures the most efficient work from its workers at the
minimum possible cost, which is on the wage-setting curve. On the price setting
curve employment is at its highest possible level as the given wage. Those who have
jobs cannot improve their situation by changing their behaviour and those without
jobs would rather have a job but cannot get one even by offering to work at a lower
wage, because they won’t be as effective.

Question 4 (b):

A new technology that will improve productivity will raise total factor productivity. At
the pre-existing real wage, higher productivity will inevitable result in higher firm
profits, but only in the short run. In the short run, as the price setting curve rises
unemployment increases through displacement if some workers. The average
product of labour curve will shift up, shifting 𝜆 to 𝜆1. In the long run the higher profits
will attract new firms to enter, this will lead to a decrease in the rate of
unemployment making it easier for the unemployed to find jobs. This will increase
the workers’ reservation position, increasing wages, decreasing the temporary profits
for the firms. In this new equilibrium, workers have a higher productivity endowment
of labour time and a rewarded with better wages. Graphically speaking, from
equilibrium A, unemployment shifts back across the price setting curve, then it
increases overtaking the original equilibrium, then real wage rises up till new
intersection of price setting and wage setting curve. So here the real wages have
gone up and unemployment has fallen.

Question 5:

A basic income is a cash payment unconditionally delivered to all on an individual

basis, without means-test or work requirements. It is paid at regular intervals. It is
paid in an appropriate medium of exchange. It is paid on an individual basis, not a
household basis. It is paid to all, without means tested. It is unconditional, so it is
paid without a requirement to work or willingness to work (like benefits). The
statement explicitly states how ineffective traditional policy is, especially to the self-
employed and individuals with no sick pay, and I have to agree. Changes in interest
rates will only benefit those who are looking to invest, or already have used loans to
invest and now are paying lower interest payments. Others are extremely vulnerable,
and these policies don’t help. For example, the furlough scheme only helps workers
that are not able to work from home, combine that with absence of sick pay, it leaves
many workers in a vulnerable position.

A UBI will help avoid the poverty trap for those put out of work and not covered by
the furlough scheme. Being given the right to claim minimal income will fix a number
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of flaws that are currently present in the current social security system arising from
the growth of state-imposed restrictions. Currently in the UK, like many other
countries, many people in need fall through the social security net because of
growing complexities of rules over entitlement. UBI comes with another benefit; it
provides a much more robust system of support in today’s volatile coronavirus
economy. It helps tackle poverty by helping those who rely on their jobs and live
paycheck to paycheck. It trumps the current welfare system by providing certainty no
matter what the circumstances, no strings attached, such as no need to be actively
seeking work.

UBI is not all sunshine and rainbows. There are quite a few criticisms that go along
with it. Because UBI is a flat-rate payment, there is no allowance for additional
needs, that may be more important than ever during this pandemic. This leads me
right onto my next point, the fact that the public might resent an end to work
conditionality, with all citizens being given equal support, irrespective of their
contributions to society or work ethic, and that in a universal system money would go
unnecessarily to the richest in society. If money unnecessarily goes to the rich it will
fail to consider one of the government’s target; lower inequality. This is where the
welfare state system trumps UBI, it doesn’t provide unnecessary money and with it, it
helps lower inequality by targeting the money where it is most required. In the UK in
particular, a UBI scheme would involve a shift from the Beveridge principle of
national insurance based on contributions and the sharing of risk to a system of
income as of right. UBI, depending on how much it is, will inevitably lead to lower
future output as workers may just become reliant and complacent, not wanting to
work. All these points just highlight how the current social welfare system is superior
as it allocates the money where it is meant to be allocated, reducing poverty, while
also decreasing inequality.

In my opinion UBI, even in light of the current situation, is not a viable option as in all
honesty the current welfare system, combined with the furlough scheme seems to be
working just fine at allocating resources where they are meant to be instead of
everywhere. This helps avoid misallocation of resources. Maybe a good way to
tackle this is to create jobs, that way the workers that have been laid off can get back
to work and start earning again. Let’s say we were only introducing UBI as a
temporary measure, for this pandemic, it may just make individuals reliant on the UBI
and that will halt future GDP growth.

Question 6:

In 1942 Joseph Schumpeter coined the term creative destruction. Creative

destruction in this context is a process by which new technologies are introduced
that create new products or transform production processes while, in their wake,
make obsolete and redundant old technologies or methods of production. Labour
also constitutes as old technology which with the wake of new computerised
technology can and will replace a lot of labour in the near future.

Matthews answered yes and no to the question so let’s look at reason why machines
will replace a lot of labour, but not all of it. The short run effects of robots in the
labour market depends on the kind of work a worker does. If a robot is labour
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replacing, meaning for routine jobs machines and skills are substitutes, the workers
skills are less valued as they can be replaced by a machine at a much lower cost in
the long run. If a robot is labour enhancing, meaning a machine will complement the
skills of a labourer, it will increase the value of a worker that knows how to operate
the machine. The latter will not lead to technology replacing labour, but in-fact
enhancing the already existing labours’ productivity.

When it comes to looking at computerisation replacing labour, we have to look at the

tasks labour can conduct and compare it with the tasks robots can conduct. Firstly,
split tasks into routine tasks (tasks following explicit rules accomplished by
machines) and non-routine tasks (not well understood by computerised codes). Each
of these can either be manual (relating to physical labour) or cognitive (requiring
knowledge). Before computers were limited to routine tasks, but with technology
advancing, computers are also taking over non-routine tasks. Computers can
obviously conduct cognitive tasks much faster and more efficiently than labour, but
now they can also conduct manual tasks with machines in agricultural industry to
building sites. This is a clear advocate for technology is very likely to replace most
types of labour in the future.

Now, a lot of studies do show that in the near future, low-skill and low-wage jobs are
the most susceptible to being substituted by computers. In contrast, high-skill and
high-wage jobs are the least prone to computerisation. This could be partly attributed
to the fact that human labour trumps computers as it possesses the ability to acquire
new skills by means of education. High-skill jobs involve a lot of work that cannot be
coded and needs to be conducted on basis of judgement, for example stock trading
requires intuition, which as of yet cannot be coded into a software.

In conclusion, the statement is saying, before making such a bold proclamation that
automation will replace jobs, we need to look at the aspect of labour enhancing
technologies. Not all technologies replace labour, some enhance it and make it more
productive. We also need to look at the other aspects. Ven if technologies are a
introduced workers can adjust to changing technological endowments by switching
tasks, thus preventing technological unemployment. Technologies may also
generate more jobs through demand for new technologies and through increased
competitiveness. We have seen mainly only low skill jobs are at risk in the future and
there is a very easy solution; increase the skill level of the economy.