Market Failure Evident in the Pollution Created by the Extraction of Oil from Tar Sands - Coursework Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2013 Introduction Market failure is a situation in an economy where free market fails to allocate resources efficiently. It normally occurs when the mechanism of the market does not attain an optimal resource allocation. There are several cases of market failure. Some of the cases include monopoly power, missing and incomplete markets, de-merit goods, externalities, information failure, inequality and unstable markets. It is believed that market failure can be corrected effectively through government intervention. Therefore, this paper seeks to explain the market failure evident in the pollution created by the extraction of oil from tar sands. The paper also seeks to explain the regulatory powers that the government should use to mitigate and prevent disasters caused by the pollution. Market Failure Evident In the Pollution Created By the Extraction of Oil from Tar Sands Economic examination of environmental policy is majorly based on the fact that the possible harmful effects of economic activities on environment constitute an externality. It is believed that externalities are the major cause of market failure. There are two different types of externalities, positive and negative externalities. A positive externality prevails when a person or an organization making a decision does not benefit fully from the decision made. The benefit is usually more on the society than on the organization or a person making the decision. Negative externalities on the other hand prevail when producing or consuming an item or a commodity imposes a cost on the individuals who do not involve directly in consuming or producing the commodity. It is therefore important to note that market failure occurs due to existence of negative externalities. Market failure prevails when the market outcome is not efficient on economic perspective. This is because; the gains the market provides the individuals or organizations undertaking certain activity diverge from the gains to the entire society. Therefore, negative externalities such as pollution are one of the major forms of market failure. Market failure is quite evident in the extraction of oil from tar sands due to pollution caused. It is believed that the tar sands have emerged as one of the rapidly growing source of greenhouse gas pollution that poisons water, air and destroys land. Pollution of air, water and land are evident of market failure. The pollution caused by oil extraction from tar sands is an evident of market failure since the benefits that the market provides the oil extraction companies diverge from what the entire society gains. The market allows oil extraction companies to benefit at the expense of harming the society, through environmental degradation. It is believed that oil extraction companies are carelessly creating the tar sands with aims of enhancing production to a dangerous level of 6 million barrels daily by the year 2035 (Dirty Oil Sands, 2013). The extraction of oil from tar sands has a great impact on climate, land, water and air. Its environmental costs are quite high. It is believed that pit mining and drilling of tar sands are the rapidly growing sources of global warming emissions. Producing one barrel of tar sands oil produces greenhouse gas that is three times that produced by a barrel of conventional oil. This is quite disastrous particularly on climate. The extraction of oil from tar sands is disastrous to climate since its emissions are more greenhouse gas intensive as compared to emissions in conventional oil production. Emissions from tar sands have been growing rapidly for the last two decades. It is estimated that by the year 2020 the emissions would have doubled. Most oil extraction companies are continuously enhancing their production of oil from tar sands since there are no government regulations that limit the amount of greenhouse gas emitted from tar sands. The extraction of oil from tar sands has negatively affected the caribou and health of forest ecosystem. This is an evident of market failure. The market has failed to positively cater for oil extraction companies and the forest ecosystem. It is important to note that tar sands deposits are situated below the boreal forest. Boreal forest is one of the biggest intact forests around the world. It is also one of the major sources of freshwater. The total area of land covered by tar sands is approximately 140,000 square kilometres (IBCC, 2009). The entire land is also covered by forest. Therefore, in extracting oil from tar sands, a huge part of the forest is usually cut down, thus destroying the forest ecosystem. Apart from destruction of forest ecosystem, the extraction of oil from tar sands also results into land degradation as most part of the land covered by forest is usually left bare. The destruction of forest affects the climate and the individuals and animals that depend on it for survival. The tar sands are among the biggest capital project and energy undertaking around the globe. The increase in environmental footprint of tar sands growth has made the United Nations Environmental Program to mention tar sands among top one hundred environmental degradation hotspots in the world (IBCC, 2009). As mentioned earlier, the tar sands lie beneath Boreal Forest in Canada. It is believed that Boreal forest in Canada is one of the biggest unspoiled forests that still prevail on earth. The forest stretches from Alaska to Atlantic Ocean. It account for approximately 25% of intact forests remaining on earth. The Boreal Forest in Canada provides essential habitant for a number of world’s biggest population of wildlife. Some of the wildlife that depends on Boreal Forest includes grizzly bear, moose, lynx and wolves. Boreal Forest is also a home of unique and endangered species such as the Whooping Crane and Caribou (NRDC, 2012). The trees and wetlands in Boreal Forest provide essential breeding grounds for many waterfowl and songbirds. It is believed that about 50% of bird species in North America rely on the Boreal for survival. More importantly, the Boreal protects human beings from global warming through storing several amounts of carbon within its soils, trees and wetlands. Therefore, the destruction of Boreal Forest, brought about by oil extraction from tar sands, negatively affects human beings and animals, thus an evident of market failure (Dirty Oil Sands, 2013). Increase in cancer rates among the adjacent communities is an evident of market failure in pollution created by extraction of oil from tar sands. The extraction of oil from tar sands not only harms the nearby communities by enhancing the cancer rates but also through exposing the community to harmful chemicals. Therefore, the extraction of oil sands harms the adjacent communities in two ways. It harms the communities when it is being processed and when it is being refined from bitumen into gasoline. The extraction of oil sands pollutes water resources. This has directly impacted the communities downstream with enhanced rates of cancer. The extraction activity has also indirectly impacted the communities through polluting fisheries, thus endangering subsistence economy. The increase in refineries that process oil from tar sands has proved to be problematic since the synthetic heavy crude extracted from tar sands contains more toxic substances as compared to the conventional oil. Therefore, the communities, such as aboriginals, that stay near tar sands oil refineries do always encounter enhanced carbon dioxide emissions. The adjacent communities do also face enhanced exposure to heavy sulfurs and metals. Regulatory powers that the government can use in mitigating and preventing the disasters The government can employ regulatory powers such as emissions taxes and transferable emissions permits in mitigating and preventing the disasters caused by pollution. The employment of emissions taxes expects a firm or a company polluting the environment to pay a certain fixed amount of tax for every unit of pollution emitted into the environment. This therefore gives the firms the responsibility of choosing their levels of emissions. The firm will however pollute the environment while knowing the financial consequences of its actions. Due to this, and since most companies are always after minimizing their costs, the polluting firms will have a duty of minimizing emissions. Therefore, instead of prescribing a certain actions, an emissions tax permits polluters to use the prevailing technologies in attaining the level of emissions minimization that is relevant to their unique conditions. Emissions tax policy has an added advantage to polluting firms. It is believed that polluting companies can avoid payment of tax through preventing emissions. The polluting firms have a responsibility of searching and deploying cleaner methods of production. This is believed to result to cleaner environment and huge material wealth. The use of this type of regulation encourages the firms to employ production technologies that are easy to use and are environmentally friendly (Phaneuf, 2007). According to Martin (2011), the government is expected to balance the environment requirements with businesses requirements through employment of economic policies that promote responsible behavior and ensure value for money. The use of emission tax policy can be explained diagrammatically as follows. As mentioned earlier, taxes imposed on polluting firms encourage the firms to avoid their practices of polluting the environment. In case they persist on polluting the environment, the polluting firms are expected to pay a given amount of tax. When setting the levels of the tax, policy makers do always look for a point where a firm’s marginal abatement costs equals marginal benefits. This is usually a point where the level of the tax needs to be set. The above diagram clearly explains emissions tax policy. In the above diagram, point t* is the point where abatement costs meets marginal benefits. The emission is minimized when moving from point e0 to point e*, thus freeing the polluting firm from paying the emission tax. Moving from point e0 to point e* frees the polluting firm from paying for destructions and abatement costs in d, f and g as shown in the above diagram. The second regulatory power, which is transferable emissions permits, refers to a system of transferable permits. The government, under this type of regulation, is expected to determine target level of aggregate emissions in every year and distribute several certificates to the polluting companies that total up to the entire emissions target. A firm is expected to hard in a certificate if it produces one unit of pollution. This therefore implies that companies needs to have several certificates annually so as to cover up their emissions. More importantly, polluting companies can trade the certificates amongst themselves. Companies with less emissions and which requires less certificates can earn extra profits through selling the extra certificates to companies with huge emissions (Phaneuf, 2007). The use of transferable emissions permits can be illustrated diagrammatically as follows. In the above diagram, the horizontal axis represents the quantity by which the entire emissions will be minimized below uncontrolled level. Point 0 therefore represents zero reduction in emissions below the point that will occur without emissions-control policy. Curve BB is the marginal social benefits while curve CC is the marginal control costs. Therefore, as mentioned earlier, the optimal point of production can be attained if the government issues several emissions permits that are sufficient enough to result to a reduction of q-unit in discharge. Therefore, if R is the total amount of emissions without any intervention, the introduction of permits will allow a total of R-q emissions’ units. If the permits market is highly competitive, the price for one permit will be equally to f, which corresponds to marginal cleanup cost as shown in the diagram below. Conclusion From the discussion, it is clear that there is an evident of market failure in pollution created by the extraction of oil from tar sands. Market failure is quite evident in the extraction of oil from tar sands due to pollution caused by the extraction activity. The extraction of oil from tar sands has a great impact on climate, land, water and air. Its environmental costs are quite high. It has negatively affected the caribou and health of forest ecosystem. Increase in cancer rates among the adjacent communities is an evident of market failure in pollution created by extraction of oil from tar sands. The government can employ regulatory powers such as emissions taxes and transferable emissions permits in mitigating and preventing the disasters caused by pollution. References Dirty Oil Sands, 2013, Tar Sands. International Boreal Conservation Campain (IBCC), 2009, Canada’s Tar Sands. Martin J, 2011, Paying for Pollution: An Introduction to Taxes and Permits. < http://www.energysavingwarehouse.co.uk/news/319/21/Paying-for-Pollution-An-Introduction-to-Taxes-and-Permits.html> Natural Resources Defense Council (NRDC), 2012, Stop Dirty Fuels: Tar Sands. Phaneuf, D, 2007, The Economics of Pollution Control. Read More