Global Warming – the greatest market failure

Education

e.g. excess packaging

Global Warming – the greatest market failure

The end

Value-Added Tax (VAT)

Imposed on rubbish bag

Negotiation –

Kyoto Protocol

Subsidy

-Set a limit of green house gas emissions with other countries

-BUT

-The US is more powerful

-They refused to join until Obama inaugurated

• Encourage environmental organisations

• Encourage them to develop alternative energy sources
• Promote green lifestyle

Why is it a market failure?

What are its externalities?

What can the government do?

Unit Tax

Animal Agricultural

Tax on firms’ emission of green house gases

price

S2

Subsidy

These factors are the negative externalities

of production which increase

the rate of global warming

S1

P2

unit tax

P1

• Encourage recycling companies

• High recycling costs
• More willing to enter recycling industry

Negative Externalities:

-Carbon dioxide

-Nitrous oxide

-Methane

-Increase in medical costs

-Pollution from transport

-Water pollution

-Refrigerating

-Deforestation

D

0

Q2

Q1

quantity

Education

Market Failure

Solutions

• Advertisements
• Increase citizens’ awareness of global warming
• Suggest solutions of what citizens can do to alleviate this problem
• Teach citizens to recycle (e.g. Taiwan)

Government intervention:

-Tax

-Negotiation

-Subsidy

-Education

-Regulation

-Permits to pollute

- economic inefficiency

- resources are not

allocated efficiently

Subsidy

Deforestation

Massachusetts Institute of Technology (MIT) – “Climate change is the greatest market failure the world has ever seen… the costs will be equivalent to losing 5% (potentially as much as 20%) of global GDP each year, now and forever.”

Provide financial encouragement for citizens to recycle

Regulation

• for agricultural uses
• China's tropical rainforests decline 67% in 30 years
• Food and Agriculture Organization (FAO) estimated tropical deforestation (of the rain forest and other tropical forests) at 53,000 square miles per year
• each year an area of tropical forest large enough to cover North Carolina is deforested.

• The Packaging (Essential Requirements) Regulations
• Set a maximum level that a firm can pollute, if the firms’ emission of green house pollutants has exceeded, the government can fine them

Externalities

Externalities caused by global warming

Externalities

caused by global warming

- The costs or benefits imposed on 3rd parties

- Price and profits do not accurately reflect

true social costs or benefits in economic decisions

- Externalities lead to market failure

- Positive externalities (external benefit)

- Negative externalities (external cost)

Negative externalities

-Coral Reef (Great Barrier Reef)

-Global warming leading to increase in the temperature of the sea

-Over half of the coral in the Great Barrier Reef died

-World Wildlife Fund (WWF) warns that coral reef in south-east Asia may disappear by end of the century

-Antarctica runway melting

-Australia is searching for a new aircraft landing site in Antarctica because the current runway is melting due to global warming

-http://www.bbc.co.uk/news/world-20092215

-Hurricane

-Extreme climate due to global warming

Education

e.g. excess packaging

Permits to pollute

• The UK sends around 5 million tones of packaging waste to landfill each year
• Complain about packaging
• Help monitor on packaging of products
• When the government receives a certain amount of complaints, the firms would be warned
• If there is an increase of complaints, the firm would be fined

• Prepare a container when you buy take-aways
• Buy products with less packaging or buy refills

• Government can sell “permits to pollute”, which is transferable
• Creates incentives for firms to minimise their pollution, as they can sell their unused quota of permits to pollute to other firms, which can be their bonus profit