(2020) A Level H2 Econs Paper 2 Essay Q1

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1. Discarded plastic and carbon emissions are among the biggest causes of pollution. The environmental damage to the air and water runs into billions of dollars. This affects not only our health but also our food supply. 
 
Adapted from: Kimberly Amadeo, How Air, Water and Plastic Pollution Affect the Economy, 18 June 2019

(a) Explain how pollution leads to market failure. [10]

Define market failure & negative externalities 

• Market failure - When the free market / price mechanism fails to allocate resources efficiently 

• Negative externalities – Costs imposed on third parties who are not directly involved in the production or consumption of the good. 

Explain how pollution via carbon emissions lead to market failure 

1. Pollution via carbon emissions lead to market failure due to the presence of negative production externality 

2. When firms carry out the production of goods & services, they will only take into consideration their own marginal private costs and benefits 

   • Firms’ consideration of marginal private costs include various costs of production including rent, raw materials, labour etc 

   • Firms’ consideration of marginal private benefits include the revenue they derive from the sale of goods & services 

3. This fails to account for the negative externalities caused as a result of carbon emissions generated during production – this leads to presence of MEC, which causes MSC to diverge from MPC 

4. MEC = Carbon emissions can result in air pollution – where the inhalation of carbon emissions can cause breathing difficulties / lung-related problems / bronchitis by people living in the country 

5. As firms do not take into consideration the MEC, they produce at the market equilibrium output Qm where MPC = MPB instead of the socially optimal level of output Qs where MSC = MSB 

6. This results in market failure due to overproduction 

Explain how pollution via discarded plastic lead to market failure 

1. Pollution via discarded plastic lead to market failure due to the presence of negative consumption externality 

2. When individuals make use of plastic (e.g. bottles, bags), they only consider their own marginal private costs and benefits

   • Individuals’ consideration of marginal private costs include the cost of the plastic bottles / bags (which is low or non-existent most of the time) 

   • Individuals’ consideration of marginal private benefits include convenience from the 1-time use of plastics 

3. This fails to account for the negative externalities or MEC caused as a result of discarded plastics. 

4. MEC = Discarded plastics can lead to water pollution – which can end up poisoning marine creatures and therefore affecting the food supply – affecting prices of food and individuals who consume such marine creatures whose health may be affected through the consumption of contaminated food 

5. As individuals who use plastics do not take into consideration the MEC, they consume the market equilibrium output Qm where MPC = MPB instead of the socially optimal level of output Qs where MSC = MSB 

6. This results in market failure due to overconsumption 

(b) Discuss the extent to which government policy measures are likely to address this market failure. [15]

Taxes 

1. The government can impose a tax on firms causing carbon emissions to correct the market failure from overproduction 

2. This can be done by implementing a tax equivalent to the MEC 

3. This shifts the MPC to the left, forcing firms to internalise the external cost 

4. Production will thus be reduced from Qm to Qs, addressing the problem of market failure 

5. Ev – In reality, governments may find it hard to estimate the MEC to accurately implement a tax to correct the overproduction problem. In addition, there may be the potential problem of carbon leakage where firms may simply move their production to neighbouring countries. 

Legislation 

1. The government may pass laws to ensure firms / individuals carry out proper disposal of plastics to ensure that plastics are not disposed improperly into water sources causing contamination of marine food sources 

2. Individuals / firm failing to abide by such legislation can be penalised via fines 

3. This will reduce the improper disposal of plastics 

4. Ev – There is always a problem with enforcement. Enforcement not properly policed is ineffective, while yet can be costly to properly deploy manpower to ensure enforcement. 

Education campaigns 

1. Encourage reuse / reduction of use of plastics through education campaigns to encourage individuals to be more civic-minded 

2. As individuals cut back on consumption of plastics or reuse existing plastics – this will reduce the amount of plastics ending up in water sources – reducing pollution levels and thus reduce negative externalities generated 

3. Ev – It is hard to measure the success of education campaigns to properly determine if such campaigns are successful 

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