Tag: social optimum

It’s a relatively common dish to see on a menu at a restaurant: mackerel. This particular fish has been promoted as a healthy and sustainable dish, but now its sustainability is coming into question and the Marine Conservation Society has taken it off its ‘fish to eat’ list. My brother Hugh is a marine biologist and often comments on which fish we should be avoiding due to sustainability issues (especially given how much I like fish!) So, how is this an economics issue?

There a couple of key things to pick out here. Firstly, with the conservationists’ warning of this issue of unsustainability, they have been asking consumers to reduce the amount of mackerel they buy. This will naturally have an impact on fisherman. If consumers do listen to the conservationists and hence reduce their demand for mackerel, we could see a fall in the price of this fish and a reduction in the fishermen’s turnover. It could be that we see a switch in consumption to other more sustainable fish, especially if we see some form of intervention.

Another area concerning economics is the idea of over-fishing. For years, there have been disputes over who has the rights to these fish stocks. In the past, the Faroe Isles and Iceland have increased their quotas significantly, as mackerel appear to have migrated to their shores, contributing to this question of sustainability. Iceland and the Faroe Isles have ‘unilaterally agreed their quotas … as they are not governed by the common fisheries policy’.

The question is: when fisherman catch one additional mackerel, what are they considering? Do they think about the private benefit to them (or their company) or do they consider the external cost imposed on others? Whenever one fish is taken from the sea, there is one less fish available for other fishermen.

This leads to over-consumption of fish and contributes towards the well-documented depletion of fish stocks and ‘The Tragedy of the Commons’, if account is not taken of the external cost imposed on other fishermen.

The total catch is now far in excess of what has been scientifically recommended and previously agreed upon by all participating countries. Negotiations to introduce new catch allowances have so far failed to reach agreement.

There are hopes that an international policy on quotas can be agreed to ensure mackerel levels return to or remain at a sustainable level. However, at present no progress has been made. Until some form of an agreement is reached, fishermen around Iceland and the Faroe Isles will continue to battle against the conservationists. The following articles consider this fishy topic.

Mackerel taken off conservationists’ ‘fish-to-eat’ list The Guardian, Rebecca Smithers (22/1/13)
Warning over mackerel stocks Scottish Herald (22/1/13)
Fishing quota talks begin amid ongoing disputes and finger-pointing The Scotsman, Fran Urquhart (14/1/13)
Mackerel no longer an ethical choice because of over-fishing The Telegraph, Louise Gray (22/1/13)
Ths fishy tale of macro-mismanagement The Guardian, Annalisa Barbieri (22/1/13)
You can still eat mackerel – just make sure it’s British The Telegraph, Louise Gray (22/1/13)
Dispute means mackerel is no longer fish of the day BBC News, Matt McGrath (22/1/13)
Mackerel struck off sustainable fish list Associated Press (22/1/13)

Questions

  1. Why are quotas set by the EU for fishing? Who do they apply to?
  2. Why is there an externality from fishing?
  3. What is the Tragedy of the Commons? Using a diagram with average and marginal revenue product and average and marginal cost illustrate the market equilibrium and the social optimum. Why are they different?
  4. Following on from question 3, what does this suggest about the role of governments?
  5. If the conservationists’ request regarding buying less mackerel is successful, what impact might this have on fishermen and fisheries?
  6. If consumers do switch to buying other fish, what would happen to the equilibrium in the mackerel market and in the market for other fish? Think about this question in terms of general equilibrium analysis.

A campaign to introduce a tax on disposable plastic bags in England has been launched by various pressure groups, including The Campaign to Protect Rural England (CPRE), Keep Britain Tidy, the Marine Conservation Society and Surfers Against Sewage. Plastic bags, they maintain, litter streets and the countryside and pollute the seas, where they cause considerable damage to marine life.

They propose a tax of 5p per bag, which would be passed on to consumers. Such a levy has already been introduced in Wales in October 2011. As a result, plastic bag use in Wales has dropped dramatically (see also the full report from the Welsh Government). The Scottish Government and the Northern Ireland Assembly are also planning introducing similar charges.

Many other governments have introduced taxes, charges or bans on plastic bags and many more are considering introducing such measures. Ireland introduced a 15 euro cent charge on single-use plastic bags as far back as 2002 and saw a 94% reduction in plastic bag use (328 per person per year to 21). The charge was raised to 22 euro cents in 2007 after bag use rose to 30 per person.

Other countries have banned plastic bags altogether: some, such as Rwanda and Somalia have banned all plastic bags; others, such as China and South Africa have banned very thin bags; others, such as Italy, have banned non-biodegradable ones.

In the USA, various states or districts have introduced levies and in the EU, where more than four billion bags are thrown away each year, the European Commission will soon publish proposals for limiting the use of plastic bags.

So what are the arguments for limiting the use of plastic bags? Why is it not enough to leave things simply to the market? And if the use of plastic bags is to be reduced, what’s the most efficient way of doing so? Are there any problems with alternatives to plastic bags? The following articles and reports consider these questions?

Articles
England urged to pick up Wales’ plastic bag levy businessGreen, Jessica Shankleman (1/8/12)
Wales’ plastic bag charge yields massive green savings businessGreen, Jessica Shankleman (5/7/12)
Supermarkets ‘should charge £1 a bag’ BBC Today Programme, Samantha Harding and Judith Holder (2/8/12)
Environmentalists team up to push for bag tax in England Plastics News, Anthony Clark (1/8/12)
Break the Bag Habit Keep Britain Tidy (1/8/12)
Plastic bag use ‘up for second year running’ Guardian, Rebecca Smithers (5/7/12)
Plastic bag use in Wales plummets due to 5p charge, figures show Guardian, Adam Vaughan (4/7/12)
Carrier bag charge ‘effective and popular’ figures reveal ITV News (4/7/12)
What should be done about plastic bags? BBC News Magazine, Chris Summers (19/3/12)
Irish bag tax hailed success BBC News, Chris Summers (20/8/02)
The Big Fix The Math Behind Sacking Disposable Bags Atlantic Cities, Nate Berg (26/9/11)
Fremantle moves to ban plastic bags ABC News, Lucy Martin (23/7/12)
Bans Plastic Bag Ban Report, Ted Duboise (updated)
Vote With Your Dollars, and Also Vote New York Times, Gernot Wagner (30/7/12)

Reports
Evaluation Of The Introduction Of The Single-Use Carrier Bag Charge In Wales: Attitude Change And Behavioural Spillover, Wouter Poortinga, Lorraine Whitmarsh and Christine Suffolk Report to Welsh Government by Cardiff University (June 2012)
Life cycle assessment of supermarket carrierbags: a review of the bags available in 2006 Environment Agency, Joanna Marchant (25/7/11)
Stakeholder consultation on options to reduce the use of plastic carrier bags … EC Environment (19/3/12)

Questions

  1. Draw a diagram demonstrating the externalities involved in the use of plastic bags. Show the marginal private and social costs and benefits and the socially efficient level of consumption.
  2. How would you set about establishing the amount of consumer surplus from the use of plastic bags at a zero price?
  3. Compare the relative social efficiency of a tax on plastic bags with a ban on plastic bags.
  4. Would education be an effective alternative to taxing plastic bags?
  5. Why might it be difficult to get supermarkets and other retailers to agree to a voluntary ban on giving out free plastic bags?
  6. Why might it be extremely difficult in practice to establish the socially efficient price for plastic bags?

No market is perfect and when the market mechanism fails to deliver an efficient allocation of resources, we say the market fails and hence there is justification for some government intervention. From a monopolist dominating an industry to a manufacturing firm pumping out pollution, there are countless examples of market failure.

The Guardian is creating a guide to climate change, covering areas from politics to economics. The problem of climate change has been well documented and this blog considers a particular issue – the case for climate change or the environment as a market failure. In many cases just one market failure can be identified, for example an externality or a missing market. However, one of the key problems with climate change is that there are several market failures: externalities in the form of pollution from greenhouse gases; poor information; minimal incentives; the problem of the environment as a common resource and the immobility of factors of production, to name a few. Each contributes towards a misallocation of resources and prevents the welfare of society from being maximised.

When a market fails, intervention is justified and economists argue for a variety of policies to tackle the above failures. In a first-best world, there is only one market failure to tackle, but in the case of the environment, policy must be designed carefully to take into account the fact that there are numerous failings of the free market. Second-best solutions are needed. Furthermore, as the problem of climate change will be felt by everyone, whether in a developed or a developing country, international attention is needed. The two articles below are part of the Guardian’s ultimate climate change guide and consider a huge range of economic issues relating to the problem of environmental market failure.

Why do economists describe climate change as a ‘market failure’? Guardian, Grantham Research Institute and Dunca Clark (21/5/12)
What is the economic cost of climate change? Guardian (16/2/11)

Questions

  1. What is meant by market failure?
  2. What are the market failures associated with the environment and climate change? In each case, explain how the issue causes an inefficient allocation of resources and thus causes the market to fail? You may find diagrams useful!
  3. What is meant by the first-best and second-best world?
  4. What does a second-best solution aim to do?
  5. Using diagrams to help your explanation, show how a tax on pollution will have an effect in a first best world, where the only market failure is a negative externality and in a second best world, where the firm in question is also a monopolist.
  6. What solutions are there to the problem of climate change? How effective are they likely to be?
  7. Does the need to tackle climate change require international co-operation? Can you use game theory to help your explanation?!

The following video and audio podcasts look at resistance by the US oil and coal industries to measures to curb the consumption of oil and coal. Despite the clearly estabilised link between burning fossil fuels and global warming, many in the two industries reject, or at least question, the evidence. After all, it is in their commerical interests to promote the consumption of fossil fuels!

Elsewhere in the USA, interesting scientific developments are taking place to combat global warming. One measure is the production of ‘green oil’ produced from algae. Growing the algae absorbs carbon from the atmosphere.

In few areas are economic arguments so intertwined with political ones. The podcasts look at some of the issues.

Energy policy divides in the US BBC News, David Shukman (2/11/09)
America’s energy policy dilemma BBC News, David Shukman (2/11/09)
Texas takes on green energy BBC News, Roger Harrabin (1/06/09)
Ethical Man: Green revolution in Texas BBC Newsnight, Justin Rowlatt (11/3/09)
Climate plans part of wider battle over American freedom Ethical Man (Justin Rowlatt) blog (BBC) (3/11/09)
Obama urges climate change effort BBC News (3/11/09)
Al Gore on tackling global warming BBC Newsnight (4/11/09)
Al Gore on beating the ‘oil habit’ BBC Today Programme (4/11/09)

Questions

  1. To what extent will the free market result in a shift to greener energy sources? Why will any shifts towards greener fuels still not result in the socially or environmentally optimum use of fossil and ‘green’ fuels without government intervention?
  2. What policies could governments adopt to internatlise the externalities involved in burning fossil fuels?
  3. How suitable are cap-and-trade policies (tradable permits) for tackling global warming? What conditions are necessary for such policies to be effective?
  4. Why is tackling climate change politically difficult for (a) individual countries and (b) the world as a whole? How is game theory relevant to your analysis?

The US Institute of Medicine of the National Academies has recently published a 92-page on report on childhood obesity and the use of taxes on junk foods to tackle the problem. In the report, titled Local Government Actions to Prevent Childhood Obesity, “a panel of experts suggested such taxes could play an important role in helping children make healthier eating choices”.

Meanwhile, in Australia, the Federal Government’s preventive health taskforce argued, amongst other things, that “junk food advertising should be phased out, the cost of cigarettes should be more than $20 a packet, and soft drinks and cask wine should be hit with higher taxes”.

So how effective are higher taxes in achieving a reduction in ill health associated with eating, drinking and smoking? If adopted, what is the socially optimum design and rates of such taxes? What other complementary policies could be adopted? The following articles consider the issues.

More support for a junk-food tax Los Angeles Times (2/9/09)
Tax junk food, drinks to fight child obesity-report Reuters (31/8/09)
Could Raising Taxes on Junk Food Curb Obesity? eMaxHealth (2/9/09)
Junk food and tobacco under fire The Age (Australia) (2/9/09)
What price health? The Australian (2/9/09)

Questions

  1. For what reasons does the free market fail to achieve an optimum level of consumption of junk foods, alcohol and cigarettes?
  2. How would you determine the socially optimum level of consumption of such products?
  3. How are the price, income and cross-price elasticities of demand, and the price elasticity of supply, relevant to assessing the effectiveness of taxes for reducing the consumption of unhealthy products?
  4. What determines the incidence of taxes on unhealthy products?
  5. What other policies would you advocate to tackle the problems associated with consuming unhealthy products? How would they affect the price elasticity of demand for such products.
  6. To what extent do the objectives of social efficiency and equity conflict when designing appropriate policies to discourage unhealthy consumption?