Market failure occurs when the free market fails to deliver an efficient allocation of resources. Pollution by cars is a prime example of a negative externality or an external cost. We pay road tax and face high tax rates on petrol, but another form of government intervention is due to come into effect. From the 1st January 2011, nine models of electric car will be eligible for grants of up to £5000 (although only three models will be immediately available). By subsidising certain electric cars, the government is aiming to give people an incentive to switch to these so-called more environmentally friendly cars, as they will now be cheaper.
There are concerns, however, that generating the electricity to charge these cars still emits carbon dioxide. The Transport Secretary, Philip Hammond, said:
There’s no point in switching the car fleet to running on electricity if the electricity emits vast amounts of carbon dioxide.
So is the electric car the car of the future?
Nine electric cars will be eligible for subsidies BBC News (14/120/10)
Cash grants for environmentally friendly cars announced Telegraph (14/12/10)
£850,000 to kickstart use of electric cars in NI BBC News (14/12/10)
UK names nine electric cars eligible for subsidy Reuters (14/20/10)
Questions
- What is the purpose of a subsidy? Using a diagram explain how it will work and what the impact should be.
- Why is pollution an example of a market failure? Illustrate this on a diagram.
- Why could electric cars also be an example of a market failure? Illustrate this on a diagram.
- How will the subsidy aim to encourage more firms to produce electric cars and also more consumers to buy them?
- Is there an argument for increased investment in technology to produce electric cars more cheaply and more effectively?
- Why is there such a high demand for car usage?
A two-week international climate change summit opened in Cancún, Mexico, on 29 November. But will the talks make any progress in tackling global warming? Will mechanisms be put in place to ensure that the previously agreed ceiling of 2°C warming is met?
After the largely unsuccessfuly talks in Copenhagen a year ago, hopes are not high. But a likely rise in global temperatures of considerably more than 2°C could have disasterous global consequences. Indeed, new evidence suggests that even a ceiling of 2°C may be too high and that, as temperatures rise towards that level, domino effects will start that may become virtually unstoppable. As Andrew Sims in the Guardian article notes:
This is the problem. Once the planet warms to the point where environmental changes that further add to warming feed off each other, it becomes almost meaningless to specify just how much warmer the planet may get. You’ve toppled the first domino and it becomes virtually impossible to stop the following chain of events. Honestly, nobody really knows exactly where that will end, but they do know it will end very, very badly.
The following podcasts and articles look at the importance of reaching international agreement but the difficulties of doing so.
Podcasts and webcasts
Post-Copenhagen, a Cancun compromise? Reuters (30/11/10)
Climate change ‘Dragons’ Den’: What are the options? BBC News, Roger Harrabin (29/11/10)
Cancun climate change summit seeks new emissions deal BBC News, David Shukman (3/12/10)
Can nudge theory change our habits? BBC News, Claudia Hammond (29/11/10)
Articles
Cancún climate change conference 2010 Guardian, (portal)
Q&A: Cancún COP16 climate talks Guardian, Shiona Tregaskis (8/10/10)
72 months and counting … Guardian, Andrew Simms (1/12/10)
Cancún climate talks: In search of the holy grail of climate change policy Guardian, Michael Jacobs (29/11/10)
Cancún and the new economics of climate change Guardian, Kevin Gallagher and Frank Ackerman (30/11/10)
Facing the consequences The Economist (25/11/10)
UN climate talks low on expectation BBC News, Richard Black (29/11/10)
Expect little from Cancun talks The Star (Malaysia), Martin Khor (29/11/10)
Don’t let us down: UN climate change talks in Cancun Independent, Jonathan Owen and Matt Chorley (28/11/10)
Cancun and Climate: Government Won’t Act, But Business Will Time Magazine: The Curious Capitalist, Zachary Karabell (28/11/10)
At Global Climate Change Talks, an Answer Grows Right Outside Huffington Post, Luis Ubiñas (29/11/10)
Cancun climate change talks: ‘last chance’ in the snakepit The Telegraph, Geoffrey Lean (29/11/10)
Climate Change Talks Must Deliver After Record Weather Year Scoop (New Zealand), Oxfam (29/11/10)
World climate talks kick off in Cancun DW-World, Amanda Price and Axel Rowohlt (29/11/10)
On international equity weights and national decision making on climate change Vox, David Anthoff and Richard S J Tol (29/11/10)
Climate treaties all bluster, no bite The Age, Dan Cass (10/12/10)
Conference website
UNFCCC COP16/CMP6: Mexico 2010 Official site
Questions
- What would count as a ‘successful’ outcome of the climate change talks? Why might politicians interpret this differently from economists?
- What can governments do to internalise the externalities of greenhouse gas emissions?
- What insights can game theory provide into the difficulties of reaching binding climate change agreements?
- What are likely to be the most effective mechanisms for getting people to adapt their behaviour?
- Can nudge theory be used to change our habits towards the environment?
- Explain the use of equity weights in judging the effects of climate change. Are they a practical way forward in devising environmental policy?
You might think that small environmentally-friendly companies would be moving into the green energy market: that setting up a wind farm, for example, would be a perfect business opportunity for a small company. In fact, the big companies are taking over this market. As the Der Spiegel article below states:
Europe’s wind energy sector is currently experiencing a major transformation. New massive offshore wind parks are soon expected to crop up off Europe’s coastline. Big companies like Siemens and General Electrics are increasing their stakes in a market worth billions. But experts warn that a new energy oligopoly may soon emerge.
So what is it about the wind energy market that makes it suitable for an oligopoly to develop? The two articles explore this question.
Winds of Change Der Spiegel, Nils-Viktor Sorge (1/11/10)
GE and Siemens Outpacing Wind Pioneers, Becoming Clean Energy’s “New Oligopoly” Fast Company, David Zax (2/11/10)
Questions
- What market failures are there in the wind energy market?
- What barriers to entry are there in the wind energy market?
- What economies of scale are there in this market?
- How are changes in this market affecting the minimum efficient scale of companies?
- Would there be room in the market for enough competitors to prevent collusion?
- How might the authorities prevent (a) open and (b) tacit collusion in the wind energy market?
- Do small wind energy companies have any market advantages?
Student fees are set to rise to between £6000 and £9000 per year from 2012 (see Will students be Browned off?. But I’m sure you know that already! Not surprisingly, there has been considerable debate about the effects on student debt and whether potential students will be put off from applying to university. But there is another issue, explored in the article below. This is the question of the ‘marketisation’ of higher education.
With the exception of the STEM subjects (science, technology, engineering and maths) universities will no longer receive any teaching subsidy from the government. Teaching will have to be funded from student fees. This means that provision will depend on supply and demand. If there is a high demand for certain courses, then the courses will be financially viable for universities. If not, they will have to close (unless the university chooses to cross-subsidise them from other profitable courses).
This might be fine if the market for university places were perfectly competitive and if questions of inequality of access were fully taken into account. But the higher education market is not perfect. The article looks at some of these imperfections and why, therefore, a pure market system will fail to achieve the optimum allocation of university places.
Browne’s Gamble London Review of Books, Stefan Collini (4/11/10)
Questions
- What information failures are there in the market for higher education places?
- What externalities are involved in higher education and will this lead to an over or underprovision of higher education in a pure market system?
- Apart from externalities and information asymmetries, what other market failures apply to the market for student places in HE?
- What are the arguments for subsidising non-STEM subjects (as well as STEM ones)? Should these subsidies vary from course to course and from university to university?
- What is the best way of tackling the problem of unequal access to higher education?
Governments and businesses across the world have been trying to become more environmentally friendly, as everyone becomes more concerned with climate change and emissions. In the UK, incentives had been put in place to encourage large-scale organisations to reduce their consumption of gas and electricity. The Carbon Reduction Commitment Scheme began in April 2010, with companies and public-sector orgainisations required to record their energy consumption. Then in April 2011 it was planned that those consuming over 6000 MWh of electricity per year (about £500,000 worth) would be required to purchase ‘allowances’ of £12 for each tonne of carbon dioxide that is emitted by their use of fuel: electricity, gas, coal and other fuels. This would require the organisations working out their ‘carbon footprint’, using guidance from the Department of Energy and Climate Change. In the case of coal and gas, the emissions would be largely from burning the fuel. In the case of electricity it would be largely from generating it.
The government had intended to use the revenue received from the sale of allowances to pay subsidies to those firms which were the most successful in cutting their emissions.
By raising money from the largest emitters via a levy and giving it back as a ‘refund’ to those who cut their usage the most, the government would not have been able to raise any revenue, but it did tackle the core of the problem – reducing emissions. However, following the Spending Review, this scheme will now actually generate revenue for the government. Paragraph 2.108 on page 62 of the Spending Review states the following:
The CRC Energy Efficiency scheme will be simplified to reduce the burden on businesses,
with the first allowance sales for 2011-12 emissions now taking place in 2012 rather than 2011. Revenues from allowance sales totalling £1 billion a year by 2014-15 will be used to support the public finances, including spending on the environment, rather than recycled to participants. Further decisions on allowance sales are a matter for the Budget process.
Over 5000 firms and other organisations will now find that their hard work in cutting usage and being more environmentally friendly will give them much less reward, as the revenue raised from the levy will remain in the Treasury. All that firms will now gain from cutting emissions is a reduction their levy bill. The extra £1bn or more raised each year from the scheme will undoubtedly be beneficial for tackling the budget deficit, but it will no longer provide subsidies to firms which reduce their emissions. Furthermore, PriceWaterhouseCooper estimates that it will cost businesses with an average gas and electricity bill of £1 million an extra £76,000 in the first year and this may increase to an additional cost of £114,000 per year by 2015.
It’s hardly surprising that businesses are angry, especially when this withdrawal of subsidy, which some have dubbed a ‘stealth tax’, was not mentioned in the Chancellor’s speech, but was left to the small print of the Spending Review announcement. The following articles look at this highly controversial plan.
Articles
Spending Review: Large firms ‘face green stealth tax’ BBC News (21/910/10)
Business lose out via £1bn-a-year green ‘stealth tax’ Management Today, Emma Haslett (21/10/10)
Fury over £1bn green stealth tax in spending review Telegraph, Rowena Mason (20/10/10)
Is ‘stealth’ tax a threat to UK economy going green? BBC News, Roger Harrabin (20/10/10)
Green spending review – it could have been a whole lot worse Business Green, James Murray (20/10/10)
Coalition hits big business with stealth carbon tax Business Green, James Murray (20/10/10)
UK government hits big businesses with stealth carbon tax Reuters, James Murray (20/10/10)
UK’s carbon tax bombshell takes business by surprise Reuters, Will Nichols and James Murray (21/10/10)
CRC allowances sting in UK Spending Review The Engineer, M&C Energy Group (22/10/10)
The CRC scheme
CRC Energy Efficiency Scheme Department of Energy and Climate Change
Questions
- How does a tax affect the supply curve and what would be the impact on the equilibrium price and quantity?
- To what extent might this “stealth tax” (i.e. withdrawal of subsidy) adversely affect (a) businesses in the UK; (b) the economy more generally?
- Why will firms have to re-look at their cash flow, costs and revenue following this change? How might this affect business strategy?
- By taxing firms using more gas and electricity, what problem is the government trying to solve? (Think about market failure.)