Life in UK: November 2007

This is the essay that i wrote for IEA.. but unfortunately didn't win. I am positive that not picking me is the biggest mistake IEA has ever made.

In The Times on 31st October 2006, Sir Nicholas Stern was quoted as saying that climate change is the “greatest and widest-ranging market failure ever seen”.

In no more than 1,500 words explain:

1) What is meant by ‘market failure’;
2) How climate change could be tackled without government intervention;
3) If you think Sir Nicholas is correct.

Answer to Question 1:

Market failure refers to the state in the economy when the allocation of resources in the market is not efficient, i.e. maximum satisfaction of wants and social and economical benefits are not being achieved by the total output. The costs of factors of production and externalities are high for the whole economy and prices of commodities do not represent their production costs. Hence, market failure is the result of economic inefficiency.

Economic inefficiency can occur from the existence of negative externalities due to the production of goods and services. These are the external costs imposed by the producers on the economy, which harms it and have to be endured by it alone. They include, for example, the emission of greenhouse gases by different industries due to inefficient resources allocation.

Secondly, non provision of public goods due to non-profitability and because of their non-excludable and non-rival nature and no or inadequate provision of merit goods such as hospitals and education may also lead to market failure as limited number of people will benefit from them due to their restricted supply and high prices.

Imperfect competition also causes market failure, where powerful producers, monopolies or cartels may restrict supply, lower quality and increasing prices of their products to have lower average costs and abnormally high profits, causing loss of productive capacity. Besides this, the market may be restricted to other producers by them.

Widespread inequality of wealth and income due to few people benefiting from the commodities and their production and misusing the factors of production will further accelerate the market failure, by making the economy worse off as wealth will only be concentrated in a few hands.

Imperfect information will cause unsuccessful allocation of resources, as producers may not have the perfect information of what and how to produce to satisfy maximum wants using minimum resources.

Finally, immobility of factors of production, whether occupational or geographical, also leads to market failure. As they might not be able to employ themselves in the occupation that satisfies most wants.

Thus, market failure is the result of all these imperfections in the economy.

Answer to question 2:

Climate change poses a serious threat of market failure to the world economy. Tackling it should be the first priority of the private sector.

This can be done by having environmentalists join hands with oil companies like Shell and Esso to reduce the demand of goods that contribute to global warming by constantly increasing their prices. This will increase demand and make cleaner fuel types like ethanol and natural gas more competitive. However if sales still rise, these profits can be reinvested in finding cleaner production techniques and alternatives of fossil fuels. It will be then easier for car and aircraft manufacturers like Boeing and Airbus to produce and promote their cleaner technology like hybrid cars produced by Honda and Toyota. Primary costs of mitigation and new technologies can be reduced by mass production and experience. In addition, oil drilling companies should be responsible to refill the gap in the rocks by injection liquid carbon in them.

Energy should be produced by cleaner resources like tidal waves, biomass, hydrogen, wind and sun and less by fossil fuels. More companies like Sterling Energy Systems and Solar Solutions Inc who use these resources should be established. Production companies, producing energy by fossil fuels like British Gas (which already produces zero carbon energy), should have emission controllers installed in their plants so deep cuts in emission can be achieved. Mitigation can be helped by organisations like USGBC which helps in making energy efficient houses and buildings. Future investments should be done in low carbon infrastructure.

No-till or minimum-till farming methods should be adopted. Organic fertilisers should be manufactured by companies like Impact Fertilisers and Incitec Fertilisers and used along with hand-held fertiliser detectors by the primary sector. Companies such as Al-Maco should produce farm machinery that does not decrease the soil fertility when ploughing the land. Vast carbon storages should be maintained by sustained forestry, conservation of forests and agricultural lands so that carbon is not released into the air. Wood based industries and companies like Mercer International and Nata Reforestation and Management can help in doing so.

Besides this, mitigation companies should be established who inject iron into the sea to encourage plant growth or liquefy carbon and then dump it into the seabed so that it cannot be released back into the atmosphere

Moreover, land-fill sites should be modernized so that they have appropriate technology to capture and utilize methane efficiently and more recycling and waste management companies like AVR who aim for zero waste should be set up so that minimum waste is dumped into them.

Insurance companies and banks should provide risk-based schemes and loans on flexible borrowing policies, even to developing countries. Investment companies like Morgan Stanley or Clean Energy Investment Framework can also invest in mitigation.

Conclusively, international equally distributed collective action on investment in clean technology and mitigation is crucial to enable its transfer and specialisation, the sharing of risks, rewards and more research and development to have benefits in the long run.

Moreover, NGO’s, donors, multilateral development institutes, charities, media, advertising and publishing companies such as R J Lauren and STM can use informative and persuasive advertisements and articles, to educating the public about the hazards of climate change. High quality regional climate predictions about rainfalls and storms, which will be critical to drive industries and markets, should be provided by these sources of information.

Last but not the least, adaptation is important. It automatically happens as economies respond to climate change. Ways of living should be altered, more climate resilient crops should be produced to keep up with the amount of food production, there should be more proper disaster management techniques and emergency responses and developed countries should help poorer countries to adapt as poverty and greater vulnerability to climate change will limit their capacity to act.

Thus private companies and organizations should get more involved and proactive to stop the atmosphere from further deteriorating. All these measures will help in keeping the carbon levels between 450-550ppm[1]. If they do not take place, industries will collapse as the carbon emitting resources run out, which at present are the back-bone of the economy, resulting in a market failure.

Answer to question 3:

Huge amounts of externalities, mainly emission of greenhouse gases, caused by business-as-usual activities, will cause climate change all over the globe and direct, extensive and irreversible impacts on ecosystems and its natural carbon absorption capacity. Many species on land and in the water will face extinction as worlds’ forests and natural habitats demolish. Ocean acidification will increase, decreasing fish and marine stock. Thus the ecosystem will not be able to maintain its current form.

Melting of ice caps due to global warming will increase the sea level causing more floods, droughts, heat waves, hurricanes, disastrous tidal waves, sudden shifts in regional weather patterns like monsoon, high rainfall and temperature variability, effecting water availability and the ability to produce crop yield and fulfil basic needs. Water based industries, and countries depending on primary sector will face high costs and low output leading to decline in exports and poverty making them the ones to suffer the most.

Therefore, needs of society not being fulfilled, poverty on a wide scale causing investment and production of capital goods to decline, malnutrition due to shortage of food, homelessness, increased deaths and illnesses due to more frequent natural disasters and vector borne diseases such as malaria and dengue fever and heat stress will threaten livelihoods causing increase in migration rates as people move away from coastal areas, congestion problems in the main areas, immobility of factors of production and making adaptation even more difficult. Further more, coastal areas like London will face high costs to cope with ocean-related natural disasters.

Less output will affect the standard of living as incomes of people decline. Their effected health, size and mobility will lead to a deflatory economy with no real economic growth and high unemployment, causing more shortage of supply and inflation.

As a result, less revenue will be generated by the government from taxes, but it will experience dramatically increased expenses due to natural disasters, leading to bankruptcy, increased debts and failure to achieve its aims. Provision of adequate, cheap and good quality public, merit goods and infrastructure will also be effected.

Small companies who import or use raw material for manufacturing might collapse due to their high production costs and decreased efficiency. But however the multinational companies might form monopolies as they will have the capital needed to find cheap raw material, and then, cause inflation with low output and quality. This will also cause inequality of wealth and income on a worldwide basis as very few needs will be satisfied due to inefficient allocation of resources.

Thus fulfilment of even basic needs will be threatened by climate change on a world-wide basis due to less output resulting in a widespread market failure.