Tuesday, September 20, 2016

10 Steps to Success

Your success on the final exam will depend on your ability to use this book, your economics class, and your textbook to your best advantage. Below are the outline a strategy:

1. Take notes from the book.
Active reading is the key to effective studying. Mere highlighting is less effective than taking notes because it is too passive and therefore the material does not necessarily get "processed" through your brain. If you read about a concept and then write down a description in your own words, you create a self-contained explanation that speaks your language and will be easy to remember while studying for the exam. If you cannot explain the concept to yourself on paper, this is a clear indication that you need to study the material further. Try reading the corresponding section in this book to see if that explanation makes more sense to you than the one in your textbook.
2. Use colored pens and rulers for clarity.
Graphs drawn freehand in one color quickly become an unreadable mess as more and more curves are added and shifted. Graphs are essential to solving economic problems: Take pride in your draftsmanship and draw graphs that are so clear that they scream the answers out at you. Drawing your graphs too small can also make them unnecessarily hard for you (and test graders, come exam time) to understand. Remember the wise words of economist Erik Weissman: "If you can't solve the problem, draw a larger graph!"
3. Summarize what you've learned.
For example, you will learn about the supply curve in this book, during classroom lectures, from textbooks, and perhaps from active learning exercises and computerized tutorials. Sum-marize what you learned about each concept and curve in a central place. Summary sheets will serve you well during your final preparations for the exam.
4. Draw all of the graphs, complete with proper labels, until you know them by heart.
As we will note throughout this book, graphs can be your best friend or your worst enemy.
You need them on your side, so study them and draw them until you can draw them without looking at the book. On your summary sheets, explain the slopes, intercepts, and intersections to yourself in your own words. Be sure to learn the axis labels as well.
One of the most common mistakes students make when studying is to look at graphs and solutions to problems and think something like, "That's familiar to me; I can do that." Riding a bike may also look easy until you try it the first time. Then you discover that it takes a lot of practice. Economics is very much the same. Even after you feel comfortable with the material, it takes a lot of practice before you know how to correctly approach and conquer the problems. So get on that bike and practice!
Explaining concepts to your classmates can be one of the best ways to solidify informa¬tion in your own memory bank and learn what you don't understand. Be sure that your participation in the study group is balanced between giving and receiving help. If you are spending a lot of time on the receiving end, you need to spend more time studying indepen¬dently before joining the group session. Watching others solve problems is no substitute for solving them yourself.
By coming to class prepared, you will have a better understanding of the lecture, and you will be able to ask questions about the reading while that material is being covered in class. It is more awkward to raise questions on textbook material that was covered during a previous class.
You probably won't remember what you don't write down. A good teacher has gems of wisdom that you won't want to forget. This is also a chance to practice drawing graphs and rehearsing definitions.
Don't let the lecture or the reading get ahead of you. New concepts will build on old con¬cepts and a little shyness early on can lead to a lot of confusion later. Most teachers would agree with the following principles:
Don't worry that asking questions will signal a lack of intelligence to your teachers; it typically has the opposite effect. Those who ask questions are generally the best students.
If one person has a question, it's likely that many people in the class have been wondering the same thing. They will be silently relieved that you had the courage to inquire.
There's no such thing as a stupid question—you're taking the course precise¬ly because you don't already know this stuff.
The above nine steps will get you far, but sometimes you will still be unclear on a few things. Do not hesitate to ask your teachers questions after class that you could not ask during class. If they cannot help you directly, they can probably help you find the answer to difficult questions using library resources, economists in the area, the Internet, or other sources of information. Remember that economics is a broad field and even the Nobel Prize winners can't answer every question on the spot. You might get a more thorough and accu¬rate answer by not always expecting an immediate response. You might ask something like, "Could you cover this in class tomorrow?"

Thursday, January 14, 2016

Managerial Challenge

In the second decade of the twenty-first century, companies all across the industrial landscape are seeking to achieve sustainability. Sustainability is a powerful metaphor but an elusive goal. It means much more than aligning oneself with environmental sensitivity, though that commitment itself tests higher in opinion polling of the latent preferences of American and European customers than any other response. Sustainability also implies renewability and longevity of business plans that are adaptable to changing circumstances without uprooting the organizational strategy. But what exactly should management pursue as a set of objectives to achieve this goal?

Management response to pollution abatement illustrates one type of sustainability challenge. At the insistence of the Prime Minister of Canada during the Reagan Administration, the U.S. Congress wrote a bipartisan cap-and-trade bill to address smokestack emissions. Sulfur dioxide and nitrous oxide (SOX and NOX) emissions precipitate out as acid rain, mist, and ice, imposing damage downwind over hundreds of miles to painted and stone surfaces, trees, and asthmatics. The Clean Air Act (CAA) of 1990, amended in 1997 and 2003, granted tradable pollution allowance assets (TPAs) to known polluters. The CAA also authorized an auction market for these TP A assets. The EPA Web site (www.epa.gov) displays on a daily basis the equilibrium, market-clearing price (e.g., $250 per ton of soot) for the use of what had previously been an unpriced common property resource—namely, acid-free air and rainwater. Thereby, large point-source polluters like power plants and steel mills earned an actual cost per ton for the SOX and NOX-laden soot by-products of burning lots of high sulfur coal. These amounts were prompdy placed in spreadsheets designed to find ways of minimizing operating costs.2 No less importantly, each polluter felt powerful incremental incentives to mitigate compliance cost by reducing pollution. And an entire industry devoted to developing pollution abatement technology sprang up.

The TPAs granted were set at approximately 80 percent of the known pollution taking place at each plant in 1990. For example, Duke Power's Belews Creek power plant in northwestern North Carolina, generating 82,076 tons of sulfur dioxide acidic soot annually from burning 400 train carloads of coal per day, was granted 62,930 tons of allowances (see Figure 1.1 displaying the 329 x 365 = 120,085 tons of nitrous oxide). Although this approach "grandfathered" a substantial amount of pollution, the gradualism of the 1990 cap-and-trade bill was pivotally important to its widespread success. Industries like steel and electric power were given five years of transition to comply with the regulated emissions requirements, and then in 1997, the initial allowances were cut in half. Duke Power initially bought 19,146 allowances for Belews Creek at prices ranging from $131 to $480 per ton and then in 2003 built two 30-story smokestack scrubbers that reduced the NOX emissions by 75 percent.

Another major electric utility, Southern Company, analyzed three compliance choices on a least-cost cash flow basis: (1) buying allowances, (2) installing smokestack scrubbers, or (3) adopting fuel switching technology to burn higher-priced low-sulfur coal or even cleaner natural gas. In a widely studied case, the Southern Company's Bowen plant in North Georgia necessitated a $657 million scrubber that after depreciation and offsetting excess allowance revenue was found to cost $476 million. Alternatively, continuing to burn high-sulfur coal from the Appalachian Mountain region and buying the requisite allowances was projected to cost $266 million. And finally, switching to low-sulfur coal and adopting fuel switching technology was found to cost $176 million. All these analyses were performed on a present value basis with cost projections over 25 years.
Southern Company's decision to switch to low-sulfur coal was hailed far and wide as environmentally sensitive. Today, such decisions are routinely described as a sustainability initiative. Many electric utilities support these sustainable outcomes of cap-and-trade policies and even seek 15 percent of their power from renewable energy (RE). In a Case Study at the end of the chapter, we analyze several wind power RE alternatives to burning cheap high-sulfur large carbon footprint coal.

The choice of fuel-switching technology to abate smokestack emissions was a shareholder value-maximizing choice for Southern Company for two reasons. First, switching to low-sulfur coal minimized projected cash flow compliance costs but, in addition, the fuel-switching technology created a strategic flexibility (a "real option") that created additional shareholder value for the Southern Company. In this chapter, we will see what maximizing capitalized value of equity (shareholder value) is and what it is not.

Discussion Questions
  1. What's the basic externality problem with acid rain? What objectives should management serve in responding to the acid rain problem?
  2. How does the Clean Air Act's cap-and-trade approach to air pollution affect the Southern Company's analysis of the previously unpriced common property air and water resources damaged by smokestack emissions?
  3. How should management comply with the Clean Air Act, or should the Southern Company just pay the EPA's fines? Why? How would you decide?
  4. Which among Southern Company's three alternatives for compliance offered the most strategic flexibility? Explain.

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