Greenhouse Gas Emissions Essay Download Pdf - Free Essay Example

Sample details Pages: 9 Words: 2643 Downloads: 3 Date added: 2017/06/26 Category Ecology Essay Type Research paper Did you like this example? Introduction Greenhouse gas emissions, and other forms of environmental pollution, are economic externalities as they impose costs on individuals and communities who did not create the pollution (Jaffe et al, 2005). These economic externalities are side effects that are experienced by individuals not connected with the polluting process (Owen, 2006). As such, the individual or entity from which the pollution originates does not need to reflect the pollution costs within their prices. Don’t waste time! Our writers will create an original "Greenhouse Gas Emissions Essay Download Pdf" essay for you Create order The problem therefore lies in the associated costs to society that environmental pollution causes. These damages and costs, which include climate change, in the form of biodiversity loss, rising sea levels and extreme weather events, are not paid for by the companies or industries that emit the pollution and so they do not need to factor these costs into the market price of the goods or services that they provide (Muller et al, 2011). The result of this is that society produces and consumes high volumes of pollution-creating products, whilst industries continue to produce these goods and services without having to account for the costs associated with environmental pollution (Frankel and Rose, 2005). This form of market failure is addressed by market-based environmental policies that construct systems which incorporate the costs associated with environmental pollution into the industrys decision making and financial process (Metcalf, 2009). The theoretical basis for these market-b ased policies is that when an industry or other pollution making entity see, and must pay for, the societal cost of pollution, then they will design innovative ways in which to reduce their environmental impact. In addition, the full environmental cost of the products will be reflected in the price, therefore enabling consumers to make informed purchasing decisions (Owen, 2006). The remainder of this document will consider the effectiveness of market-based policies compared with traditional command and control regulations. Command and Control versus Market-Based Policies Traditional command and control policies required polluters to reduce emissions by installing specific technology in order to meet specific performance emission standards (Hepburn, 2006). However, opponents to the command and control mindset state that this form of regulation is inflexible and does not take into consideration that some industries are able to meet these targets at a much lower cost than others (Liu et al, 2014). Additionally, the command and control regulatory approach does not incentivise industries to innovate and reduce their environmental impacts by more than what is required by the standard (Haselip et al, 2015). Conversely, market-based approaches have been reported to provide greater flexibility for industry (Pirard, 2012). However, it is necessary to address the type of pollutant being emitted, as there are some that need to be maintained at a very low level for health-related reasons (Centre for Climate and Energy Solutions, 2012). As such, it may be nec essary to control these types of pollutants with command and control regulations in order to ensure that health-related thresholds are not breached. Greenhouse gases are not harmful on a localised basis. Their effects are only seen when they are globally mixed within the atmosphere and cause damage on a global scale (Meinshausen et al, 2011). As such, many proponents claim that market-based regulatory approaches are particularly appropriate to reduce greenhouse gas emissions (Pirard, 2012; Hrabanski et al, 2013; Boisvert et al, 2013). Indeed, there is evidence to suggest that these policies provide greater compliance flexibility and can reach and improve environmental objectives at much lower overall costs (Boisvert et al, 2013). One key aspect of these market-based policies is that they provide a financial incentive for industry to develop and deploy lower environmental pollution emitting technologies, whilst leaving the private market to decide which technologies can be expande d and utilised (Pirard, 2012). Within this structure, each regulated industry is able to independently choose the most cost-effective method to achieve the required pollution abatement. As previously mentioned, some industries are able to reduce their pollution more easily and cheaply than others, due to the technology or equipment that they are using. This enables them to reduce their pollution more, therefore compensating for those industries who are unable to meet traditional command and control targets due to the costs involved. As such, the overall environmental target can still be achieved but at a much lower societal and industry cost (Pirard, 2012). A good example of the success of market-based policies has been seen within the US. At the federal level, sulphur dioxide emissions have been reduced at a fraction of the original estimated cost (CCES, 2012). In addition, at state level, market-based approaches have been successfully incorporated into cap-and-trade and renewable energy programs to reduce nitrogen oxides and other greenhouse gases (CCES, 2012). The following sections will consider two distinct examples of market-based policies that can control greenhouse gas emissions. Taxes Taxes, that set a price on each unit of pollution, are the most basic form of market-based policies. This pollution tax ensures that the industry producing the pollution pays an additional cost dependent on the amount of pollution that is emitted (Vossler et al, 2013). This cost incentivises the industry to reduce the amount of pollution produced and encourage them to change their processes or incorporate better technology within their production line (Suter et al, 2005). As such, the more emissions that are reduced, the less pollution tax the industry needs to pay. However, it is necessary to calculate the societal cost of the pollution in order to set the price of the tax (Chiroleu-Assouline et al, 2014). This can be a complex process with the societal costs of pollution being difficult to quantify. For example, if the pollution emitted from a certain industry caused a population decline in a commercial shellfishery, then the damages could be based on the lost value of the shellf ish at current market price. However, if the emitted pollution causes the extinction of a species or the destruction of a habitat, it is less clear on how society should assign a financial cost which equates to that loss. In addition, it is necessary to address how the environmental pollution emitted from todays industries can cause damage to future generations and how to quantify these consequences when there are a range of possible outcomes (CCES, 2012). Cap-and-Trade The cap-and-trade approach sees the regulatory authority determining a total quantity of pollution that is acceptable (Betsill and Hoffmann, 2011). This is the cap. Industries are able to trade emission allowances based on their needs. However, there is a limited number of these allowances, so trading comes at a cost (Betsill and Hoffmann, 2011). Each regulated industry holds enough allowances to ensure that the cap is not breached whilst also creating demand for the allowances (Stephan and Paterson, 2012). For some businesses, it may be less costly for them to reduce their emissions than to buy allowances, therefore encouraging them to analyse their polluting activities and reduce their environmental impact. Some businesses are able to reduce their emissions to such an extent that they have excess allowances, which can be either banked for future use or sold to businesses that are struggling to reduce emissions. However, due to the scarcity of the allowances and their tradable nat ure, a price is placed on greenhouse gas emissions (Stephan and Paterson, 2012). This price results in an incentive for businesses to develop innovative technology to reduce emissions, with an added incentive to reduce their emissions to such a level that they can avoid buying allowances or can trade allowances they have been given (Betsill and Hoffmann, 2011). With the latter, businesses are able to raise revenue by selling these excess allowances (Piraud, 2012). This reduced environmental cost can then be passed on to their consumers, with cheaper goods and services, therefore giving them an advantage within the consumer market. Problems with Quantity-based and Price-Based Market Policies Evidence suggests that there is a tradeoff between quantity-based (cap-and-trade) and price-based (pollution tax) approaches (CCES, 2012). This tradeoff is either greater environmental certainty or greater compliance cost certainty. By setting an explicit price on each unit of environmental pollution, the regulated businesses have a high degree of price of certainty (Pizer, 2006). However, what is less certain is the amount of environmental pollution reduction that can be achieved, as each business will respond differently to the tax costs. For example, by placing a tax on each litre of fuel, one company may reduce its fuel consumption by 20%, whilst another company may only reduce its consumption by 2%. As such, it is difficult to estimate what price to place on the tax in order to achieve a specific emission reduction goal. Conversely, with quantity-based market approaches, such as the cap-and-trade program, there is more certainty surrounding the environmental outcomes due to the scarcity of pollution allowances that make up the cap (Pizer, 2006). However, with this environmental certainty comes a cost uncertainty for the businesses emitting the pollution, as the cost of this pollution will be determined by the market price for the allowances (Pizer, 2006). Yet some market-based policies can be designed to allow more certainty for both price and quantity. For example, The Centre for Climate and Energy Solutions (2011) included price floors and allowance reserves, which act as prices ceilings, within the Regional Greenhouse Gas Initiative in California, in order to give more compliance cost certainty. Revenue Uses from Taxes or Allowance Sales Both price-based and quantity-based regulatory approaches have the potential to raise revenue for the government (Nordhaus, 2007). With environmental taxes, potential revenue raised will equate to the total quantity of greenhouse gas emissions released to the environment within a set timescale multiplied by the price of the tax. With cap-and-trade programs, the amount of revenue generated depends on the price allowances make on the open market and the number of allowances that are offered up for sale (Nordhaus, 2007). Regardless of how these revenues are raised, the benefits to society of this revenue stream are clear. Revenue use examples include the reduction of existing distortionary taxes on capital and labour investments in order to reduce the economy wide cost of the program, and the offset of taxes on the labour markets, individuals and businesses, as seen in both Sweden and British Columbia (Aldy et al, 2008). Nevertheless, some experts suggest that this carbon revenue s hould be used for other purposes. These experts argue that there is a need to address the question of equity in addition to economic efficiency (MacKenzie, 2009). This equity would avoid burdening some households and businesses, particularly if they adopted clean energy approaches, technological adaptation, or positioned themselves within the research and development arena. An example of this can be seen within the member states of the Regional Greenhouse Gas Initiative. In this initiative, 100% of allowances are auctioned and 25% of the revenues generated are targeted towards consumer benefit, energy efficiency programs and renewable energy schemes. In total, over the last 7 years, these allowance auctions have generated more than $2 billion (Regional Greenhouse Gas Initiative, 2015). Conclusion It can be seen from the above narrative that both price-based and quantity-based market approaches to reducing greenhouse gas emissions can be highly successful and popular methods of achieving environmental targets. Environmental taxes ensure that the cost of environmental pollution is covered by the polluter in a polluter pays approach. Each unit of pollution is given a specific price which the polluter has to pay. These costs incentivise the industry to adopt more environmentally friendly approaches in order to reduce their financial outgoings. Cap-and-trade programs have a given number of allowances distributed between businesses within an industry sector. Companies that can produce their goods in a more environmentally friendly manner, which sees them having an excess of allowance, are able to trade these allowances on the open market to companies who are less able to meet environmental targets. However, due to the costs of these allowances, there is an added incentive for bus inesses to adopt, or develop, new technologies that reduce their environmental impact. However, both approaches have their limitations as it is difficult to quantify the financial costs of pollution in order to set a price on environmental taxes, and there are many uncertainties for the environment and for businesses with the cap-and-trade approach. Nevertheless, despite these uncertainties and challenges associated with price setting, it is considered that the flexibility for businesses and potential improvements for the environment by adopting these approaches over the traditional command and control regulation outweigh any negatives. Whilst it is accepted that market-based approaches will not work for all environmental pollutants, for greenhouse gases, which cause effects on a global scale, the evidence suggests that these approaches will encourage innovation and incentivise businesses to adopt best available technology. References Aldy, J. E., Ley, E., Parry, I. (2008). A Taxà ¢Ã¢â€š ¬Ã¢â‚¬Å"Based Approach to Slowing Global Climate Change. National Tax Journal, 493-517. Betsill, M., Hoffmann, M. J. (2011). The contours of cap and trade: the evolution of emissions trading systems for greenhouse gases. Review of Policy Research, 28(1), 83-106. Boisvert, V., MÃÆ' ©ral, P., Froger, G. (2013). Market-based instruments for ecosystem services: institutional innovation or renovation? Society Natural Resources, 26(10), 1122-1136. Center for Climate and Energy Solutions (2011), Climate 101: Cap and Trade. Available online at https://www.c2es.org/publications/climate-change-101/cap-trade accessed 26 September 2015. Centre for Climate and Energy Solutions. (2012). Market mechanisms; understanding the options. Available online at https://www.c2es.org/publications/market-mechanisms-understanding-options accessed 26 September 2015. Chiroleu-Assouline, M., Fodha, M. (2014). From regressive pollution taxes to progressive environmental tax reforms. European Economic Review, 69, 126-142. Frankel, J. A., Rose, A. K. (2005). Is trade good or bad for the environment? Sorting out the causality. Review of Economics and Statistics, 87(1), 85-91. Haselip, J., Hansen, U. E., Puig, D., TrÃÆ' ¦rup, S., Dhar, S. (2015). Governance, enabling frameworks and policies for the transfer and diffusion of low carbon and climate adaptation technologies in developing countries. Climatic Change, 131(3), 363-370. Hepburn, C. (2006). Regulation by prices, quantities, or both: a review of instrument choice. Oxford Review of Economic Policy, 22(2), 226-247. Hrabanski, M., Bidaud, C., Le Coq, J. F., MÃÆ' ©ral, P. (2013). Environmental NGOs, policy entrepreneurs of market-based instruments for ecosystem services? A comparison of Costa Rica, Madagascar and France. Forest Policy and Economics, 37, 124-132. Jaffe, A. B., Newell, R. G., Stavins, R. N. (2005). A tale of two market failure s: Technology and environmental policy. Ecological Economics, 54(2), 164-174. Liu, Z., Mao, X., Tu, J., Jaccard, M. (2014). A comparative assessment of economic-incentive and command-and-control instruments for air pollution and CO2 control in Chinas iron and steel sector. Journal of Environmental Management, 144, 135-142. MacKenzie, D. (2009). Making things the same: Gases, emission rights and the politics of carbon markets. Accounting, Organizations and Society, 34(3), 440-455. Meinshausen, M., Smith, S. J., Calvin, K., Daniel, J. S., Kainuma, M. L. T., Lamarque, J. F., Van Vuuren, D. P. P. (2011). The RCP greenhouse gas concentrations and their extensions from 1765 to 2300. Climatic Change, 109(1-2), 213-241. Metcalf, G. E. (2009). Market-based policy options to control US greenhouse gas emissions. The Journal of Economic Perspectives, 33(4), 5-27. Muller, N. Z., Mendelsohn, R., Nordhaus, W. (2011). Environmental accounting for pollution in the United States eco nomy. The American Economic Review, 1649-1675. Nordhaus, W. D. (2007). To tax or not to tax: Alternative approaches to slowing global warming. Review of Environmental Economics and Policy, 1(1), 26-44. Owen, A. D. (2006). Renewable energy: Externality costs as market barriers. Energy Policy, 34(5), 632-642. Pirard, R. (2012). Market-based instruments for biodiversity and ecosystem services: A lexicon. Environmental Science Policy, 19, 59-68. Pizer, W. A. (2006). 38 Choosing Price or Quantity Controls for Greenhouse Gases. The RFF Reader in Environmental and Resource Policy, 9(1), 225-227. Regional Greenhouse Gas Initiative (RGGI) (2015). CO2 Budget Trading Program Auction Results. Available online at https://www.rggi.org/market/co2_auctions/results accessed 26 September 2015. Stephan, B., Paterson, M. (2012). The politics of carbon markets: an introduction. Environmental Politics, 21(4), 545-562. Suter, J., Poe, G., Schulze, W., Segerson, K., Vossler, C. (20 05). Beyond optimal linear tax mechanisms: an experimental examination of damage-based ambient taxes for nonpoint polluters. In Selected Paper prepared for presentation at the American Agricultural Economics Association Annual Meeting, Providence, Rhode Island, July 24 (Vol. 27). Vossler, C. A., Suter, J. F., Poe, G. L. (2013). Experimental evidence on dynamic pollution tax policies. Journal of Economic Behavior Organization,93, 101-115.

The Characters Of Pity In Wilfred Owen And Guy De Maupassant

Despite Wilfred Owen and Guy de Maupassant writing two different types of text, pity is inevitable for their characters for which they must be able create. Owen creates pity for the soldier by explaining how he has been forced into a wheelchair. This is shown in the text when Owen writes â€Å"He sat in a wheeled chair, waiting for dark†. This implies that the Soldier does not want to be in the wheelchair because it is too early for the soldier to die. Owen creates pity by using pathetic fallacy. The soldier who is â€Å"waiting for dark† is ultimately a euphemism for death, showing that hed rather die than be in the care home which he is currently in. Furthermore, Owen suggests the Soldier does not want to be in the care home again when he†¦show more content†¦This demonstrates that the Soldier is now unable to look after himself, and must be looked after by others, which furthermore shows how the Soldier does not get to live out his childhood and learn how to do things for himself. Owen creates pity for the Soldier using a caesura again when he writes â€Å"Smiling they wrote his lie; aged nineteen years.† The caesura used here generates the same feelings of sadness for the Soldier as the first example, because on both occasions the Soldier has had something done to him, and he has not done it for himself. Owen creates pity for the Soldier using the caesura because the reader knows the Soldier is t old enough to fight, but yet the British Army signed him up anyway. Maupassant creates pity for Madame Loisel by using a tricolon to demonstrate how little she has for herself. Madame Loisel has â€Å"no fine dresses, no jewellery, nothing.† giving the impression that she is not wealthy, but merely getting by. This is highlighted when Maupassant states at the beginning of the text that Madame Loisel is â€Å"unable to afford anything better,† showing an indication of poverty. This creates pity for Madame Loisel because everyone in life enjoys the finer things, even if it may just be one item, it provides the sense of luxury, which however Madame Loisel does not have. The use of the tricolour enhances the pity created in by Maupassant as it

Stefan’s Diaries Origins Chapter 8 Free Essays

I’m not sure how long we stayed in the room together. The minutes ticked away on the grandfather clock in the corner, but all I was aware of was the rhythmic sound of Katherine’s breath, the way the light caught her angular jaw, the quick flick of the page as we looked through the book. I was dimly conscious of the fact that I needed to leave, soon, but whenever I thought of the music and the dancing and the plates of fried chicken and Rosalyn, I found myself literally unable to move. We will write a custom essay sample on Stefan’s Diaries: Origins Chapter 8 or any similar topic only for you Order Now â€Å"You’re not reading!† Katherine teased at one point, glancing up from The Mysteries of Mystic Falls. â€Å"No, I’m not.† â€Å"Why? Are you distracted?† Katherine rose, her slender shoulders stretching as she reached up to place the book back on the shelf. She put it in the wrong spot, next to Father’s world geography books. â€Å"Here,† I murmured, reaching behind her to take the book and place it on the high shelf where it belonged. The smell of lemon and ginger surrounded me, making me feel wobbly and dizzy. She turned toward me. Our lips were mere inches apart, and suddenly the scent of her became nearly unbearable. Even though my head knew it was wrong, my heart screamed that I’d never be complete if I didn’t kiss Katherine. I closed my eyes and leaned in until my lips grazed hers. For a moment, it felt as though my entire life had clicked into place. I saw Katherine running barefoot in the fields behind the guest house, me chasing after her, our young son slung over my shoulder. But then, entirely unbidden, an image of Penny, her throat torn out, floated through my mind. I pulled back instantly, as if struck by lightning. â€Å"I’m sorry!† I said, leaning back and tripping against a small end table, stacked high with Father’s volumes. They fell to the floor, the sound muffled by the Oriental rugs. My mouth tasted like iron. What had I just done? What if my father had come in, eager to open the humidor with Mr. Cartwright? My brain whirled in horror. â€Å"I have to †¦ I have to go. I have to go find my fiancï ¿ ½e.† Without a backward glance at Katherine and the stunned expression that was sure to be on her face, I fled the study and ran through the empty conservatory and toward the garden. Twilight was just beginning to fall. Coaches were setting off with mothers and young children as well as cautious revelers who were afraid of the animal attacks. Now was when the liquor would flow, the band would play more loudly, and girls would outdo themselves waltzing, intent to capture the eyes of a Confederate soldier from the nearby camp. I felt my breath returning to normal. No one knew where I’d been, much less what I had done. I strode purposefully into the center of the party, as if I’d simply been refilling my glass at the bar. I saw Damon sitting with other soldiers, playing a round of poker on the corner of the porch. Five girls were squeezed onto the porch swing, giggling and talking loudly. Father and Mr. Cartwright were walking toward the labyrinth, each holding a whiskey and gesturing in an animated fashion, no doubt talking about the benefits of the Cartwright-Salvatore merger. â€Å"Stefan!† I felt a hand clap my back. â€Å"We were wondering where the guests of honor were. No respect for their elders,† Robert said jovially. â€Å"Rosalyn’s still not here?† I asked. â€Å"Y know how girls are. They have to look just ou right, especially if they’re celebrating their impending marriage,† Robert said. His words rang true, yet an unexplainable shiver of fear rushed down my spine. Was it just me, or had the sun set remarkably quickly? The revelers on the lawn had changed to shadowy figures in the five minutes since I’d been outside, and I couldn’t make out Damon within the group in the corner. Leaving Robert behind, I elbowed my way past the party guests. It was odd for a girl to not show up at her own party. What if, somehow, she’d come into the house and she’d seen †¦ But that was impossible. The door had been closed, the shades drawn. I walked briskly toward the servants’ quarters near the pond, where the servants were having their own party, to see if Rosalyn’s coachman had arrived. The moon reflected off the water, casting an eerie, greenish glow on the rocks and willow trees surrounding the pond. The grass was wet with dew, and still trampled from the time when Damon, Katherine, and I had played football there. The knee-high mist made me wish I were wearing my boots instead of my dress shoes. I squinted. At the base of the willow tree, where Damon and I had spent hours climbing as children, was a shadowy lump on the ground, like a large, gnarled tree root. Only I didn’t remember a tree root in that spot. I squinted again. For a moment, I wondered if it could be a pair of intertwined lovers, trying to escape prying eyes. I smiled despite myself. At least someone had found love at this party. But then the clouds shifted, and a shaft of moonlight illuminated the tree–and the form beneath it. I realized with a sickening jolt that the shape wasn’t two lovers in mid-embrace. It was Rosalyn, my betrothed, her throat torn out, her eyes half open, staring up at the tree branches as if they held the secret to a universe she no longer inhabited. How to cite Stefan’s Diaries: Origins Chapter 8, Essay examples

Investment Decisions Under Uncertainty Financial Markets

Question: Describe about the Investment Decisions Under Uncertainty for Financial Markets. Answer: 1. Financial Investment and uncertainty: Text Paraphrase Introduction Arestis et.al (2012) The development of the financial sector ever since the financial liberalization process, which started in the early 1970s, and the great evolution of financial investment through this period suggest that serious consideration of this complex phenomenon is in order. The increasing importance of financial activities also exerts another effect on accumulation via uncertainty. The development of financial activities, which has permitted the appearance of new activities and financial assets without a strong regulation of them has boosted speculation, thereby promoting the creation of financial bubbles. According to this view, an increase in uncertainty means that businessmen face difficulties in their attempt to foresee the future, which is less predictable now. Our model also highlights a negative incidence of uncertainty on accumulation, since this phenomenon makes it more difficult for businessmen to foresee the future. The financial liberalization process paved the way for the emergence of the financial sector which along with the progress of financial investment has brought this intricate issue to the forefront. Accumulation is also affected by the rapidity of financial activities via uncertainty. Financial bubbles originate from increasing speculation which is a result of the lack of regulation on financial activities and assets. Rising uncertainly implies the failure of corporate houses to anticipate the future. Our model emphasizes the adverse effect of uncertainty on accumulation. Rigotti Shannon (2005) Knight (1921) argues that uncertainty, however, creates frictions that these institutions may not be able to accommodate. Ellsberg (1961) suggests a more precise definition of uncertainty, in which an event is uncertain or ambiguous if it has unknown probability. In particular, Ellsbergs paradox illustrates important consequences of this distinction by showing that individuals may prefer gambles with precise probabilities to gambles with unknown odds. According to Knight (1921), uncertainty gives way to conflicts that such corporations might fail to absorb. Uncertainty, according to Ellsberg (1961), is defined as an event which is associated with an unknown probability. Ellsbergs paradox posits situations where gambles with given probabilities are preferred to gambles with unspecified odds. (Davidson 1991) According to the Keynesian literature, the investment decision has to be taken in a context characterized by the presence of uncertainty and the absence of perfect information. In this uncertain world, there is no room to apply probability as the ultimate way to predict the expected values of economic variables (Davidson 1991). Keynesian literature suggests that investment decisions have to be made under uncertainty and lack of perfect information. Davidson (1991) claims that probability cannot be used as a fundamental instrument to forecast the expected values of economic variables. Keynes, 1973 Keynes views about uncertainty have been explored at great length by Shackle, Vickers, Davidson and others. For Keynes, the information needed to make an optimal investment decision - the future net revenues that will be generated by each potential investment project - does not exist and therefore cannot be known at the moment of choice. It is not out there for agents to find. For Keynes, the future is created by current and future agent decisions that are inherently unpredictable: About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know (Keynes, 1937, p. 214). Nonetheless, firms and wealth holders must make investment and portfolio selection decisions; they cannot avoid the decision- making dilemma created by Keynesian uncertainty. We do not know what the future holds. Nevertheless, as living and moving beings, we are forced to act (Keynes, 1973, p. 124). According to Keynes (1973), the complete set of information that an optimal investment decision requires the potential return from each investment project - is not available and hence cannot be accounted for at the point of decision-making. He suggests that the future is an end result of the decisions taken by economic agents in the present and future which again cannot be foreseen. However, investment and portfolio decisions have to be made by corporations and investors who are subject to the dilemma that Keynesian uncertainty generates. Keynes, 1973 Keynes, by way of contrast, outlined a solution to this problem: he adopted a theory of conventional decision making. Keynes theorized an expectations formation process based on custom, habit, tradition, rules of thumb, instinct, and other socially constituted practices.5 He argued that in normal times at least, agents base their forecasts on conventional assumptions such as: (1) the future will look like the relevant past extrapolated (modified only to the extent that we have more or less definite reasons for expecting a change [Keynes, 1936, p. 148]); and (2) while individual agents understand themselves to be inescapably ignorant of the future, the collective or average opinion or the conventional wisdom is seen as reasonably or even scientifically well informed. As an alternative solution, Keynes (1973) opted for conventional decision-making. He suggested the generation of expectations according to the custom, tradition, habit, instinct, rules of thumb and other social phenomenon. According to Keynes, generally economic agents form anticipations in accordance with conventional assumptions: (1) the future is a reflection of an accurately deduced past, (2) Though individual agents may be unaware about the future, the mass collaboration is considerably well informed. Hong Bo and Robert Lensink (2007) the outcome of empirical study may be explained by the fact that, on the one hand, an increase in uncertainty increases the investment threshold, whereas, on the other hand, an increase in uncertainty increases the probability that the investment threshold will be hit. A rising uncertainty pushes up the investment threshold as well as the probability that this threshold will be reached. Lucas 1981, p. 224). Lucas has argued that in cases of uncertainty, economic reasoning will be of no value (1981, p. 224). Lucas (1981) asserts that economic logic will be non-functional under uncertainty. Chuli et.al 2013 The effects of uncertainty on equity prices and other financial variables have also been analyzed. In this stream, Bansal and Yaron (2004) provide a model in which markets dislike uncertainty and worse long-run growth prospects reduce equity prices. In the same line, Bekaert et al. (2009) find that uncertainty plays an important role in the term structure dynamics and that it is the main force behind the counter-cyclical volatility of asset returns. According to Bansal and Yaron (2004), in which uncertainty reduces equity prices via effects on long-run growth. Bekaert et al. (2009) suggest that the counter-cyclical volatility of asset returns emerges from uncertainty. Chuli et.al 2013 Empirical studies have frequently relied on proxies of uncertainty, most of which have the advantage of being directly observable. Such proxies include stock returns or their implied/realized volatility (i.e., VIX or VXO), the cross-sectional dispersion of firms profits (Bloom, 2009), estimated time-varying productivity (Bloom et al., 2014), the cross-sectional dispersion of survey-based forecasts (Dick et al., 2013; Bachmann et al., 2013), credit spreads (Fendolu, 2014), and the appearance of uncertainty-related key words in the media (Baker et al., 2013). Although these uncertainty proxies have provided key insights to the comprehension of uncertainty, and have been reliable starting points for the analysis of the economic impacts of uncertainty on economic variables, most of them have come under criticism, most notably from Scotti (2013) and JLN. On the one hand, volatility measures blend uncertainty with other notions (such as risk and risk-aversion), owing to the fact that they do not usually take the forecastable component of the variation into account before calculating uncertainty. Empirical studies have often been based on proxies of uncertainty such as stock returns or their implicit / acquired volatility, the cross-sectional dispersion of firms profits, estimated time-varying productivity, cross-sectional dispersion of survey-based forecasts, credit spreads and the display of uncertainty-related key words in the media. These proxies have rendered considerable perceptions to the analysis of uncertainty and to the analysis of the effects of uncertainty on economic parameters. However, they have time and again been criticized. Since volatility measures do not account for the predictable component of variation before determining uncertainty, they can combine uncertainty with other issues such as risk and risk-aversion. Crotty 1993 confidence in the meaningfulness of the forecasting process will shatter, and key behavioral equations may become extremely unstable. These are the points of crisis and panic that have pride of place in Keynesian, Minskian, and Marxian theories of investment instability, but are prohibited by assumption in neoclassical investment theory because they are incompatible with its Vision. The validity of the anticipation process will fade out and the main behavioral equations may be subject to tremendous instability. These points are highlighted in the Keynesian, Minskian and Marxian theories of investment instability. However, in the neoclassical investment theory, these are rues out by assumption due to stark contradictions. Mishkin 1997 A dramatic increase in uncertainty in financial markets, due perhaps to the failure of a prominent the financial sector, a recession, political instability, or a stock market crash, makes it harder for lenders to screen out good from bad credit risks. The increase in uncertainty, therefore, makes information in the financial markets even more asymmetric and may worsen the adverse selection problem. The resulting inability of lenders to solve the adverse selection problem renders them less willing to lend, leading to a decline in lending, investment, and aggregate activity. Differentiating between good and bad credit risks has become difficult for lenders due to the growing prevalence of uncertainty in financial markets. The reasons behind this may be a recession, political instability or a collapse of the stock market. Thus, the asymmetry of information in the financial markets and the issue of adverse selection are further magnified. This naturally results in the reluctance of lenders to lend because of the difficulty of adverse selection which in turn reduces investment and aggregate economic activity. Aistov and Kuzmicheva, 2012 Theoretical and empirical research singles out several mechanisms (channels) through which uncertainty affects investment. Nevertheless most studies specify the negative effect of uncertainty on investment. The effects of uncertainty on investment have been segregated through theoretical and empirical research. As an inference, both suggest the negative influence of uncertainty on investment. 2- Financial Investment and Instability: Text Paraphrase Intro (*) The hypothesis of financial instability was developed by economist Hyman Minksy. He argued that financial crisis are endemic in capitalism because periods of economic prosperity encouraged borrowers and lender to be be progressively reckless. This excess optimism creates financial bubbles and the later busts. Therefore, capitalism is prone to move from periods of financial stability to instability. This is a type of market failure and needs government regulation. Economist Hyman Minsky developed the hypothesis of financial instability. He suggests that the incautiousness of the borrowers and lenders during phases of economic prosperity leads to incessant financial crisis. The optimistic expectations on the part of the agents generate financial bubbles and consequent bursts. Hence capitalism is subject to fluctuations from periods of stability to those of instability. This necessitates government intervention to prevent the market failure. Minsky 1985 Indeed, he maintains that the capitalist system is flawed and prone to cyclical boom and bust. He believes modern complex financial markets to be responsible for their own crisis, by getting tangled up in risky credit structures. He states in his Financial Instability Hypothesis (FIH), that periods of stability make borrowers and lenders more and more reckless, which ultimately fuels asset bubbles. Minsky states that economy goes from hedge borrowing to speculative borrowing and eventually to Ponzi borrowing, when borrowers are most likely to default. Banks keep lending hoping that increased asset prices will enable repayment, but ponzi lending is not sustainable. People start selling their assets to keep up with other payments and this pushed assets prices down and causes crises. Later economist termed this as Minsky moment He suggests that the deficiency of the capitalist system stems from the fact that it is subject to cyclical boom and bust. According to him, financial markets pave the way for their own crisis due to their involvement in risky credit frameworks. His Financial Instability Hypothesis proclaims that temporary phases of stability turn borrowers and lenders inattentive and this ultimately culminates in asset bubbles. According to Minsky, an economy shifts from hedge borrowing to speculative borrowing to Ponzi borrowing and borrowers tend to default in the last stage. Banks endlessly lend in anticipation of rising asset prices that will ease repayment of loans. However, this lending procedure is unsustainable. In order to meet repayment mandates, people end up selling their assets thus bringing down asset prices and setting off financial crises. This is popularly known as Minsky movement. Minsky 1985 The financial instability hypothesis, therefore, is a theory of the impact of debt on system behavior and also incorporates the manner in which debt is validated. The financial instability theory describes the effect of debt on system behavior and also reflects on the procedure of debt validation. Wolfson (1986) Wolfson (1986) not only presents a compilation of data on the emergence of financial relations conducive to financial instability, but also examines various financial crisis theories of business cycles. Financial crisis theories have been studied by Wolfson (1986) in addition to collection of data relevant to financial instability. Evans 2007 Evans, differently from mainstream macroeconomists, underlines the importance of money and financial markets in a capitalist economy. Firms invest in various type of assets (i.e., diversification) to reduce risk if one of the assets fail. Although financial system has diversified certain risks, it has the potential to cause instability for the system as a whole. Money and financial markets play a crucial role in the capitalist economy according to Evans (2007). Firms diversify their investment portfolio to hedge risk. The financial system despite being vital to the diversification of risks is itself exposed to instability. Evans 2007 Since the 1970s, the financial systems in the developed capitalist countries have all experienced a major increase in size and complexity as a result of an extensive process of innovation, deregulation and internationalisation. Although the financial system has succeeded in diversifying certain forms of risk, we believe that it has created new sources of potential instability that increase the risk of a major crisis for the system as a whole. The financial liberalization has led to an expansion of the size and complications of the financial framework in the developed capitalist economies. This is an end result of widespread upheaval, deregulation and exposure to the global economic forum. On one hand, the financial system has eased the diversification of risks in certain forms. On the other hand, it has generated new sources of instability that magnifies the risk of a vital crisis for the entire economy. Mishkin 1997 The causes of financial instability occurs when shocks to the financial system interfere with information flows so that the financial system can no longer do its job of channeling funds to investment opportunities. The asymmetric information analysis we have used to understand the structure of the financial system suggests that there are four categories of factors that lead to financial instability: increases in interest rates, increases in uncertainty, asset market effects on balance sheets, and problems in the banking sector. Financial instability stems out of intervention from shocks into the financial system which deviate the channel of funds from investment opportunities. Asymmetric information analysis provides four main causes of financial instability: increases in interest rates, increases in uncertainty, asset market effects on balance sheets and problems in the banking sector. 3- Financial Investment and global crisis: Text Paraphrase Evan 2007 While the financial system plays a major role in promoting investment and growth in a capitalist economy, it can also lead to major disruption. In the nineteenth and early twentieth century, as first Britain and then the US and other European countries industrialised and built up their financial systems, major financial crises occurred about once a decade, culminating in the great crash of 1929. Financial system in addition to stimulating growth and investment might also rapidly distort a capitalist economy. Extensive financial crises that collectively led to the great crash of 1929 were actually consequences of the developing financial systems in the industrialized Britain, US and other European countries in the nineteenth and early twentieth centuries. Crises stem, in part, from the nature of credit. A credit involves a promise to pay, but if companies are unable sell all their output, despite the best of intentions, they might be unable to meet a promise to pay. Because banks are engaged in extensive networks of borrowing and lending, both amongst themselves and with firms and households, the impact of a default can be transmitted rapidly throughout the financial system. This danger is exacerbated by a widely noted tendency for banks to over-lend during periods of rapid business expansion, sometimes prompting a sharp contraction of lending a credit crunch when they find themselves overstretched, or when they fear that the expansion is about to end, something that can then set off the downturn they feared. Such instability can be reinforced by the behaviour of financial markets. The price of financial assets is strongly influenced by expectations: if the price of an asset is expected to rise, then the demand for it will increase and its price will tend to rise. In the course of a business expansion, a rise in asset prices can set off a speculative bubble, and, as a bubble takes hold, investors might borrow in order to take advantage of the rising price of shares, or of property or raw materials. But when a bubble bursts, this prompts widespread sales as investors seek to avoid a further loss, thereby exacerbating the fall in asset prices. Investors who borrowed money might now find themselves unable to repay their loans, thereby putting pressure on the banks. The credit market gives way to financial crises. Companies might unwillingly fail to meet their credit terms if they cannot sell their entire produce. Substantial borrowing and lending operations executed by banks amongst themselves and with households have exposed the entire financial system to any default on the part of the bank. Banks tend to worsen this situation by over-lending in the massive business expansion phases. When they become too overstretched or anticipate the end of the business expansion, they assert credit-crunch or shrinking lending. Financial markets further fortify such instability. Expectations largely determine the price of financial assets when individuals expect the price of an asset to rise in the near future, their demand for that asset also rises thereby actually pushing up the price of the underlying asset. During the period of business expansion, rising assert prices are likely to commence a speculative bubble. As the bubble comes to the forefront, inv estors tend to borrow such that they can benefit from the increasing share prices, property prices and resource prices. When the bubble bursts, investors in an attempt to secure themselves against further losses, sell off the assets thereby setting a decreasing trend in asset prices. As a consequence of this, they may not be able to repay their loans to the banks thereby subjecting the latter to financial pressures. Evan 2007 The period of greater financial liberalisation which began in the 1970s has also been associated with a notable increase in financial instability. The major central banks are, however, by no means sanguine about the future, and they have begun to hold internationally-coordinated exercises in which they rehearse their responses to a major financial breakdown. The pressure to achieve higher returns has led banks and other financial institutions to adopt much riskier investment positions, fuelled by the massive growth of the derivatives market, and driven by the highly leveraged activities of hedge funds and private equity funds. Although the risk of a major crisis might still be relatively low, if a financial breakdown were to spin out of control, it would have a devastating economic and social impact. Financial liberalization beginning in the 1970s was accompanied by financial instability. Uncertainty about the future has led the major central banks to acquire internationally-coordinated exercises in which they prepare beforehand for any drastic financial collapse. Banks and other financial institutions have subject themselves to highly risky investment positions in anticipation of higher returns. The main driver behind this is the tremendous development of the derivatives market coupled with highly leveraged activities of hedge funds and private equity funds. A financial collapse will adversely affect the socio-economic scenario. However, the probability of the occurrence of one is comparatively low. Barnes, P. (2010) The financial consequences of the 2007-9 financial crisis were similar to those in 1866 and 1987 in other ways. With the loss of confidence in investments and their difficulty in continuing to provide high returns, investment schemes were put under pressure. Not surprisingly, there were many failures in investment banking as a result of their dependence on profits from the boom and Ponzi schemes were discovered and collapsed. The financial crisis of 2007-09 resulted in the reduction of conviction on investments and high return prospects due to which investment schemes were subject to pressure. 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