Climate Change as an Example of Market Failure - Essay Example

Table gives a synopsis of the quality of water within five districts as well as an aggregate in water quality of England and Wales. In particular, it demonstrates the chemical content of rivers and canals during four years, namely 1990, 1995, 2000 and 2005. Throughout the period England and Wales had a greater percentage of good quality water than fair or poor quality. The aggregate improved from 48 percent in 1990 to 68 percent in 2000 and 2005. As a consequence, the percentage of poor water quality decreased from 15 percent in 1990 to 6 percent in 2005. The selected regions of England and Wales followed a similar pattern with Wales by far surpassing the other regions. In the North West region the percentage of good water quality was greater than fair or poor quality for the four year period. A similar situation occurred with Southern and Wales. In the regions of Midlands and Anglian, though, the percentage of fair water quality was greater than the good quality for the years 1990 and 1995. Nonetheless in 2000 and 2005 there seems to be a dramatic improvement in the quality of water. In the Midlands, the percentage increase moved from 45 in 1995 to 59 in 2000 and 2005 whilst Anglian increased from 39 percent in 1995 to 49 in 2000. Wales outperformed the regions by a great margin for the entire period. Their good water quality ranged from 79 percent in 1990 to 93 percent in 2005. North West came in second in terms of the percentage of good water quality to fair and poor. Anglian’s good water quality ranged from 17 to 46 percent. At no time were they able to cross the half mark of 50. Thus, Anglian seems to have performed the worst in terms of the percentage of good water quality. Although North West experienced the highest percentage of poor quality water of 27 percent in 1990 this figure was significantly decreased to 8 percent by 2005. Hence, North West had the greatest percent decrease of poor water quality of 19 percent during the period. Interestingly, in 1990 Anglian with 17 percent began as the worst performing region in terms of the smallest percent of good water quality. Although they made a 22 percent leap to 49 in 2000, they remained with the lowest percent in good water quality. WORD COUNT: 394 1) Explain how climate change may be seen as an example of market failure. The market economy is one that is run by the forces of a market, that is, the economy is based on the dynamic relationship between the prices of goods and services and the behavior of producers and consumers. For example, as consumers increase their demand for a particular good or service the price of that commodity increases. Likewise as the producers increase their output to meet the increased demand the price is affected. It is this interaction amongst the consumers’ demand, the producers or suppliers’ output and the changes in price that leads to an equilibrium price where both consumers and producers are willing to trade that constitutes market forces. Therefore, the market economy directly affects the price and consumption of goods and services. Interestingly, this market economy has a somewhat marginal relationship with public goods. Public goods refer to goods which are utilized by every member of society. Individuals who have not paid for its use are able to benefit because it is accessible to all. Further, the quantity of this good does not decrease regardless of the extent or the regularity of its usage. Hence, the climate is one example of a public good. It is consumed by all individuals under the sun; therefore any changes in the climate would affect the world’s population. A rapid increase in economic activity has led to an increase in the influences of the climate throughout the entire world. Specifically, the emission of greenhouse gases (GHGs) has resulted in the world becoming incrementally warmer ultimately increasing the costs of living on this earth. The increase in temperate of the atmosphere results in the melting of glaciers which increases the risk of floods and thereby interferes with the water supply of several nations. A reduction in the supply of water leads to a reduction in the production of crops which would affect the production of food supplies. As a result, climate changes have a domino effect on the world’s population - death from lack of clean water which fosters diseases, lack of food which promotes malnutrition and heat overexertion, shortage of homes due to the reclaiming of land areas. In addition, animal species are in danger of becoming extinct both on land and in the ocean (The Stern Review, 2006). The investment in public goods add no advantage to the private consumer therefore the regulation of the consumption of the climate rests in the hands of the policy makers and not the market. Consequently, it is only the interference of the government in terms of public policy that the consumption of public goods (the climate) may be placed under some sort of control. Hence, the market has been rendered inept in its ability to control the consumption or the price of public goods. In this instance the inability of the market to affect the price or the consumption of the climate has led economists to view climate change as a major case in point of market failure. Word Count: 494 2) Describe possible ways of limiting the impact of market failure on public goods. Public goods are those goods which are utilized by all members of every society regardless of whether they have paid for its use or not. Private consumers consider goods and services based on their ‘private costs and benefits’ rather than the ‘social costs and benefits’ (Himmelweit and Simonetti, 2004, pp.99) Individuals and companies therefore would be willing to reduce their private costs at the expense of the social costs. As a consequence,Himmelweit and Simonetti (2004) posit one solution to stem the problem of the destruction of public goods is to privatize these goods. They argue that privatization would motivate the owner to ensure that a ‘fair price’ is paid for their property (The Stern Review, 2006). Although, it is possible to privatize parts of the ocean and so protect marine life, it is not possible to privatize the air that we breathe or the climate which is influenced by the economic activity of factories, automotive industries and the like. Further, privatization is not guaranteed to result in a ‘fair price’ for the commodity. The owner may be unaware of the value of the particular public good and so trade at a price significantly below the ‘fair’ price. It is also very difficult to determine the ‘fair’ price of a commodity which would affect not only the present generation but those in the future. To deal with the impracticality and the shortfall of privatization Himmelweit and Simonetti (2004) advocated ownership of the public good by a social entity rather than private ownership. In this way, payment would be made to those who improved the public good and a tax would be levied against those who vandalized it. ‘Green taxes’ and green subsidies are two examples of this payment for the destruction or improvement of public goods. A third strategy highlighted by Himmelweit and Simonetti (2004) is to encourage parents of today to safeguard these resources for their children - the future generation. However, because the future generation does not have any ‘purchasing power’ they are not seriously considered (pp.103). Thus, the policy makers hold a great responsibility in their hands. They hold the quality of life of the future generations. However, it is only through the influence of the consumers or public outcry that policy makers would be willing to proactively protect our generations to come. Parents must continue to lobby for changes in the manner in which economic activity is implemented. There should be negative consequences to the purse or profitability of these producers who continue to disregard public goods and vandalize the heritage of our future generations. Word Count: 428 References Himmelweit, S. and Simonetti, R. (2004) ‘Nature for sale’ in Hinchliffe, S. and Woodward, K. (eds) The Natural and the Social: Uncertainty, Risk, Change, London, Routledge/The Open University. The Stern Review, (2006) The Economics of Climate Change, HM Treasury. Read More