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Explain the market failure associated with negative externality. Choose an industry from your home country that creates a negative externality. (Hint: this is your case study that you need to describe in details, provide relevant information, use table, diagrams where appropriate).

How does the government address the negative externality in your case study? Explain using economic theory and illustrate it on a diagram. Suggest your ways in which the market failure associated with negative externality can be addressed. Explain using economic theory and a diagram. (Hint: use real life data from your case study).

Identify the market structure your case study belongs to. (Hint: Briefly explain four market structures, and identify the key factors that distinguish them such as number of sellers, type of product, entry conditions, profits and losses in the short and long run. Identify the key characteristics of your chosen case study in relation to the factors used to differentiate between the market structures. Use real data from your case study).

Using your case study, evaluate the efficiency of your chosen industry. (Hint: compare the allocation of resources and market outcomes between your chosen industry and perfectly competitive market structure using theory and real data from your case study). 

Negative Externality and Market Failure

Negative externalities are the costs which are suffered by third parties due to economic transactions taking place within or around them. In economic transactions, producers and consumers occupy the position of the first and second parties respectively while the position of third parties is thereof left for any other organization, a resource or property owner that is affected by the operations indirectly (Ledyard, 2014). Spillover effect is also a term used to denote externalities, and negative externalities are also known as external costs. Externalities may both originate from the consumption end or the production end. For instance, wastes being dumped on carelessly arise from the consumption end while carbon gas emitted from factories into the air to cause air pollution arises from the production end. This paper scrutinizes the market failure as a result of negative externalities associated with mining industry in Australia

Externalities are common under the scenarios where the rights on natural property, assets and resources are not well stipulated or uncertain. This exposes these resources to misuse whose impacts are ultimately perceived by third parties. Negative externalities are associated with market failure especially when they reach extreme levels to cause impacts on other sectors of economy which are independent from the concerned industry (Briggs, Webb & Wilson, 2015).

To stand a position of deeply understanding negative externalities and their role in market failure, it is important to understand the graph of marginal social cost and private marginal cost as explained below (Boerema et al, 2016). External costs like the cost of pollution from the industries shift the marginal social cost (MSC) curve higher than that of private marginal cost (MPC) and considering the fact that an output can only be considered as socially efficient when MSC = MSB, the externalities cause a shift in the market to Q1which is lower than the market equilibrium and therefore the market becomes socially inefficient.

                                                       

However, when a negative externality comes into play, the MSB no longer equals to the MSC meaning that the allocative efficiency cannot be achieved (von, Heuermann & Hüsig, 2015).

                                               

(MPB is the Marginal Private Benefits, benefits that are reaped by producers without taking into account the impacts on society)

Government Measures to Address Negative Externality

This graph is a clear depiction of a smoking scenario which I used as an example earlier on. Negative externalities have downward shift effects on the marginal benefits; social benefits falling below the private benefits level because of the side-effects of smoking. In the graph, black triangle between MSB and MPB is the welfare loss (Vega et al, 2015). Anytime MSB =/= MSC, that is a market failure and because negative externalities leads to shifts in MSB and MSC curves, they cause market failure. To minimize welfare loss triangles, governments employ the principles of legislation, taxation and regulation

Market failures associated with negative externalities are mainly as a result of diversion of either government or individual resources which could otherwise be used for economic development purposes to deal with the consequences of negative externalities (Opp, 2018). A good example of market failure is that of government diverting the resources which could have been used in creating more job opportunities in the country to fight against respiratory diseases which are as a result of manufacturing sector pollution on the air. The case study of mining industry in Australia will be used in this paper to show how market failure can result from negative externalities.

The economy of Australia is currently defined by the booms and busts on the mining sector of the country and the country dwells on the legacies of great prosperity which has been brought by the mining industry driven mainly by coal, gold and iron mining. It is an industry which has taken a new phase currently and which seems to have a promising future across the economy of Australia. In accordance to the statistics presented by the Australian Bureau of Statistics recently, this industry stood at $118.3 billion worth between the year 2014 and 2015. Fairly, those were doom years of the industry because it had contracted by $9.4 billion the year before following the crash in commodity prices. Some years down the line, this industry is now $204 billion worth (Montolio & Planells, 2015)

The industry means a lot to the economy of Australia. According to Mineral Council of Australia (MCA), this sector is currently contributing more than 14% of the country’s economic growth and the rate is expected to continue rising. As if that is not enough, the industry’s recent capital analysis has indicated that it accounts for more than 7% of the country’s GDP. This is also an improvement considering that the figure was less than 5% according to the statistics of 2004 (Batabyal & Nijkamp, 2014).

This industry is also playing a major role in the economy of Australia in regard to creation of job opportunities. Current statistics have indicated that it is a job opportunity for more than 224,000 workers, which is considerably a good number of people considering that mining industry utilizes equipments and machinery for most of its operations and less of human workforce (Risbey, 2016). Lastly, this industry is also a major contributor to government coffers. It approximately pays $12 billion per year as taxes and royalties.

Ways to Address Market Failure Associated with Negative Externality

However, despite of the fact that this industry has opened more opportunities in the country, it has turned out to be a top contributor as far as air pollution and other related health problems to the workers and population around the area is concerned. Coupled with its operations in the areas with topographies that restrict free air movement, the operations taking place during the mining process have turned out to be major air pollutants. In addition to vehicle emissions and other re-suspended road dust, the dust particles from this  industry have reduced the quality of air substantially hence leading to increased cases of bronchitis, chronic obstructive pulmonary diseases, silicosis, asthma and pulmonary complications in both workers and the population around the mining sites (Ivanova,2014). The main threats of dust inhalation from the mining sites have been the exposure of crystalline silica. Basically, silica is found on quartz rocks and minerals and when it is cut, ground and crushed, small particles which can be easily inhaled are released into the air. Prolonged inhalation of these small particles destroys the respiratory system. Besides all the risks associated with the exposure, both the workers and society around the mining sites are exposed without any protection to dust containing silica and other pollutants which are capable of causing health problems.

There are other hazards which are associated with this industry other than the dust exposure although the main risks have been classified into three categories; chemical, physical, and physiological. Silica exposure and dust are under “chemical” category in addition to other chemicals which are present in minerals such as nitrogen oxides, carbon monoxide, sulfur- dioxide and fluoride compounds (Zhang & Moffat, 2015). In consideration to the physical hazards associated with mining process based on the working conditions and the working hours in the firm is the heat stress. The physiological hazards are evident mainly on young children working in this industry and include ergonomic concerns.

From the above scrutiny of the mining industry in Australia, there are two clear facts that come out very clearly. First, it’s beyond any reasonable doubt that the rapid development of this industry has become a noble source of job opportunities for many people who were initially jobless and maybe could find it hard to meet their basic needs. Through that approach, the emergency and rapid growth of this industry can be considered as beneficial to the economy of Australia. This is because it has created job opportunities for a large percentage of the country’s population (Bowers, Miller, Mawren & Jones, 2018).

Evaluation of Efficiency of the Mining Industry

However, considering the other side of the industry’s operational trends; there are a lot of concern which arises. First of all, the scrutiny on its operational impacts on the environment has it all that the industry is greatly causing harm to the surrounding environment through air pollution (O'faircheallaigh, 2017). From what has been presented in the current statistics, it has turned out to be a top contributor of air pollution and other related health related problems perceived in the population especially around the coal mining sites.

Also, coupled with the areas topography that restricts free air movement, the operations taking place in this area have made the area vulnerable to air pollutant. In addition to machine emissions and other re-suspended dust from the operations, dust particles from this  industry have reduced the quality of air substantially hence leading to increased cases of respiratory problems such as bronchitis, chronic obstructive pulmonary diseases, silicosis, asthma and pulmonary complications in both workers and the population around the mining sites (Mikesell & Whitney, 2017). The main threat of dust inhalation from these sites has been the exposure to the crystalline silica. Basically, silica is found quartz rocks and minerals and when it is cut, ground and crushed, small particles which can be easily inhaled are released into the air. Prolonged inhalation of these small particles destroys the respiratory system. Besides all the risks associated with the exposure, both the workers and society around the mining sites are exposed without any protection to dust containing silica and other pollutants which are capable of causing health problems.

In addition to that, there are other health hazards which have been linked with this industry other than the exposure to dust containing silica although the main risks as a result of its operation have been classified into three categories; chemical, physical, and physiological. Silica exposure and brick dust are under “chemical” category in addition to other chemicals which are present in brick kilns such as nitrogen oxides, carbon monoxide, sulfur dioxide and fluoride compounds. In consideration to the physical hazards associated with brick manufacturing based on the working conditions and the working hours in the firm is the heat stress. The physiological hazards are evident mainly on young children working in this industry and include ergonomic concerns (Chen et al, 2016).

So, this industry’s trend in causing respiratory diseases in the surrounding population comfortably fits under the category of negative externalities of the industry since the population around the mining sites doesn’t have direct links to the industry operations yet suffering as a result of its operations (Broome et al,  2015). In addition to mere diseases which are caused by the air pollution resulting from this industry, there are other negative externalities which can be perceived in the entire country rather than the surrounding community as a result of its operation. For instance, as a result of increased demand for treatment of respiratory problems which are facilitated by the operations of this industry; the cost of treatment has also gone higher in the entire country. This has affected even those who don’t have any hint on the existence of this industry but have respiratory problems.

Again, as a result of respiratory problems becoming rampant across the country, the cost of medical insurance cover especially for those with respiratory problems has escalated at an alarming rate. This has affected both those who suffer from respiratory problems as a result of air pollution from the industry as well as those who don’t have any hint on the existence of this industry (Erbas et al, 2016).

Because it’s the role of any government to ensure that its citizens get quality health care, the increasing number of respiratory problems associated with air pollution from this industry have forced the government to divert resources which could have been used to create more opportunities within the country to get the necessary machinery which would ensure that its citizens access quality treatment in regard to respiratory problems. This has led to market failure because it has slowed down the economic growth of the country (Ambrey, Fleming & Chan, 2014).

People also spend a lot in treatments, bearing in mind that the cost of treating respiratory problems within the country have increased due to its increased demand and the cost of acquiring health insurance cover has also escalated following the increased number of respiratory problems (Broome et al, 2015). A lot of money which would have been spent in sectors like business expansion and initiating new startups within the country is therefore directed to treatments hence leading to market failure.

The government of Australia has been empowering its local bodies in charge of ensuring protection of the environment and encouraging academic institutions specializing in environmental conservations to be able to come up with effective strategies which can be used to combat the escalating air pollution in the country (Duckett & Willcox, 2015). Also, the government has made its monitoring and implementation team more effective to ensure that the laws and policies which concern environmental protection are respected and that the polluters must pay for their damage to both the human health and environmental damage as a result of their operations.

As a signatory country committed to a Sustainable Development Agenda, Australia has established close connections with its stakeholders to address the issue of air pollution. Australia Health Research Council and the recent National Health Policy of Australia have both included the issue of air pollution as one of their priority research and public health agenda guaranteeing its citizens of Constitution protection in regard to negative externalities. Also, the country has started its urgent agenda of organizing future policies and actions that ensure commitments in reducing air pollution in the country (Costinot & Rodríguez, 2014).

To address the issue of market failure which is associated with negative externalities, I would suggest taxes to be imposed on the polluters and then those taxes to be narrowed down to deal with the negative impacts which are caused by the pollution. For instance, in the case of mining industry in Australia, the market failure has been linked with the government spending money which could otherwise be used in economic development to acquire machinery for the treatment of respiratory problems. Instead of government using its resources, the tax imposed on the industry should be used to take care of treatments of those respiratory problems (Waldman & Jensen, 2016).

Again, because it has also been observed that business people are spending money which could have been used to expand their businesses or launching new startups to take care of respiratory problems whose cost of treatment has escalated due to increased demands and the increased cost of health insurance schemes, the tax imposed on the polluter can be used to subsidize the treatment to avoid spending a lot of money on treatments (Ambrey, Fleming & Chan, 2014).

Capitalizing on the effective production technology is my second suggestion. Considering my case study for instance, the technology being used my many mining companies is obsolete and hence causing huge impacts on environment yet there are other technologies available and which could minimize air pollution. The government should ensure that the technologies being used in production industries are effective as possible to reduce negative externalities and which in turn will reduce the impacts of market failure (Ambrey, Fleming & Chan, 2014).

From its operation point of view, mining industry in Australia is under monopolistic competition market structure. The four major types of market structures are: perfect competition, monopolistic competition, oligopoly, and monopoly and each has its distinct characteristics as well as assumptions which affect the decision making process of a firm (Sadavarte et al, 2016).

Perfect competition is a market structure with large number of firms and that compete against each other. Any single firm in this scenario does not have significant power to control the market. Because of that, the whole industry produces outputs of socially optimal level because no any firm can influence market prices. This market structure builds on four assumptions: (1) that all firms maximize their profits (2) all firms sell identical products (3) there is no consumer preferences and (4) there is free entry and exit into the market (Kalleberg, 2018).

Monopolistic competition on the other hand refers to market structures with large number of firms competing against each other although unlike in the case of perfect competition these firms sell slightly differential goods. This accords them some degree of market control power and which can allow them charge slightly different prices. This market structure also builds on four basic assumptions:  (1) that all firms maximize their profits (2) firms can freely enter and exit the market, (3) firms deal with differential products (4) consumers may have preference on products (Price, 2017).

In an oligopoly market structure, the market is dominated by small number of firms. This limits competition among the few firms resulting to either weak competition or collaboration of the few firms. If they adopt the latter, they can use their collective market power to control prices and earn more profits. The assumptions made in this market are also four: (1) that all the firms maximize their profits, (2) oligopolies can determine their prices, (3) entry and exit is accompanied by several barriers, (4) they deal with products which are either homogenous or differentiated, and (5) the market is dominated by very few firms (Weller, Kleer & Piller, 2015).

Finally, a monopoly market structure refers to a market which is controlled entirely by a single firm. Because of that, the firm has all the market powers and consumers do not have any alternatives. Due to that, monopolists can reduce output and increase prices when they decide to have more profits. Some of the assumptions in this market structure are: (1) monopolists maximize profits, (2) the monopolists is in charge of setting prices, (3) barriers to entrance and exit into the market are high and (4) a single firm dominates the whole market (Weller, Kleer & Piller, 2015).

The mining industry in Australia is composed of large number of companies which includes but not limited to: Adani mining, Bechtel, Bhp Billiton, Cuesta coal, Fortescue metals group, Gloucester coal, Gvk, Hancock prospecting, International coal, Rio Tinto, Tinkler group Pty ltd, Newmount, Ozminerals, Xstrata, Yancoal, etc. Also, these firms mine different minerals. For that matter, the prices of their products differ from one firm to another. Therefore, from these characteristics of the mining industry in Australia, it can be concluded that the industry operates in a monopolistic market structure (Ambrey, Fleming & Chan, 2014).

Comparing the mining industry in Australia with a perfect competitive market structure, the industry is beyond doubt inefficient (Lin, 2015). First of all, a perfect competitive market states that no any single firm has a significant power to control the market and that the products within the whole industry are identical which cannot apply on the case of this industry because the firms involved in mining activities use different mining techniques which makes them sell their products at different prices based on the mining costs incurred and deal with different types of minerals such as gold, coal and iron. Also, because the products are different, consumers are free to make choice on the products which satisfies and meets their expectations and which is against what perfect competition market structure advocates for, absence of consumer preferences.

References

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Broome, R. A., Fann, N., Cristina, T. J. N., Fulcher, C., Duc, H., & Morgan, G. G. (2016). The health benefits of reducing air pollution in Sydney, Australia. Environmental research, 143, 19-25.

Bowers, J., Lo, J., Miller, P., Mawren, D., & Jones, B. (2018). Psychological distress in remote mining and construction workers in Australia. The Medical Journal of Australia, 208(9), 391-397.

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Chen, K., Glonek, G., Hansen, A., Williams, S., Tuke, J., Salter, A., & Bi, P. (2016). The effects of air pollution on asthma hospital admissions in Adelaide, South Australia, 2003–2013: time?series and case–crossover analyses. Clinical & Experimental Allergy, 46(11), 1416-   1430.

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