Moral Hazard in Ecoisland

Objective: The goal of this activity is for economics students to apply their knowledge of fiscal policy, monetary policy, supply side policy, public goods, and common pool resources to develop a comprehensive plan that addresses a moral hazard issue related to overfishing and pollution in the fictional economy of Ecoisland.

Students will analyse economic indicators and collaborate within their assigned stakeholder groups to create a plan that takes into account the interests of their respective stakeholders while considering the current economic situation and the broader consequences of their proposed solutions.

Definitions:

• Fiscal Policy: Government measures related to taxation, spending, and borrowing to influence economic activity.
• Monetary Policy: Central bank actions such as setting interest rates, controlling money supply, and influencing credit conditions to stabilize the economy.
• Supply-side policy: Economic policies aimed at improving the productive capacity and efficiency of an economy by focusing on factors affecting the supply side, such as labor productivity, infrastructure, and technological advancements.
• Public Goods: Goods that are non-excludable and non-rivalrous, meaning they are available to all and one person’s use does not diminish their availability for others (e.g., clean air).
• Common Pool Resources: Resources that are rivalrous but non-excludable, meaning individuals can deplete them, but it is difficult to exclude others from using them (e.g., fish stocks).
• Moral Hazard: A situation where one party’s actions can lead to increased risk or negative consequences for others because they don’t bear the full cost of their actions.

Ecoisland Background:

• Ecoisland is an island nation with a tourism-dependent economy, focusing on its pristine beaches, lush forests, and abundant marine life.
• The fishing industry is also a significant contributor to the economy, providing food and employment for locals and export revenue.
• Recently, a global financial crisis occurred due to a collapse in the global housing market, causing economic turmoil in many countries, including Ecoisland.
• As a result, the island’s economy is already suffering, and the government is unsure how to address the moral hazard issue of overfishing and pollution from the tourism industry.
• Overfishing and pollution have led to a depletion of fish stocks and degradation of marine ecosystems, creating a moral hazard issue as the fishing and tourism industries do not bear the full cost of their actions, leading to increased risk and negative consequences for the island’s environment and economy.