The deep sea is a frequently used example of common access resources that is over-exploited – a case of ‘The Tragedy of the Commons’ originally coined by ecologist, Garrett Hardin. It stems from a simple idea that the benefits of over-fishing (increased revenues) are private while the costs are shared. Unfortunately, such an approach is unsustainable as a result of over-consumption and subsequent market failure. Technology is both a cause of the problem and a solution too. Larger trawlers increase catch size reducing the number left to breed. However, new technology can help to monitor, collect information and enforce regulation. One extreme proposal is to ban fishing in set zones, this has been effective in some trials allowing fish to ‘restock’ and improve sustainability. Clearly, an international agreement is required, but this is hard, especially given the current rise in nationalism and self-interest. The WTO are working on something, but have been doing so for several years.
With 55% of Chinese consumers looking to reduce pollution exposure and a London mayor focused on clean air policies, the market is growing
A standard market failure essay question would ask you to consider whether government intervention is required to correct a market failure or would it be best left to market forces. This article explores the role of the latter in the context of air pollution and the growth in the number of firms producing goods to both monitor and reduce the impact of air pollution.
Here are some notes on environmental nudges given at a talk I attended by two members of the Behavioural Insights team.
Government responses to various market failures. Using knowledge of behavioural economics to nudge citizens to change to help achieve a more efficient allocation of resources.
The Economist starts its series of economics briefs with information asymmetry, its beauty lies in its simplicity. Very recently my car failed its MOT. The garage called to say repairs would cost £580 – seeking to exploit my imperfect knowledge of prices and the mechanics of my car. A few phone calls later and I managed to find a local garage willing to do the same repairs for £400. A return call to the original garage found that they would match the price, a saving of £180. I suspect many would not have bothered, I almost said “go ahead” myself, converting consumer surplus into producer surplus in the process. George Akerlof, in his seminal work ‘The market for lemons’, explains that information asymmetry is a very common cause of market failure, when economic thinking at the time was that buyers and sellers had sufficient access to information to make rational decisions, clearly rubbish.
As Harmony of the Seas sets sail from Southampton docks on Sunday she will leave behind a trail of pollution – a toxic problem that is growing as the cruise industry and its ships get ever bigger
Super-sized cruise-liners offer their owners significant economies of scale, which helps to bring down unit costs and prices, making cruising affordable to the masses. However, it comes with a social cost that is not reflected in the market price. Cruise ships emit very large levels of toxins that adversely effect the atmosphere, in particular where they dock. In addition to the noise and air pollution generated by the liner itself, local residents can also expect to see increased congestion as passengers come and go. Clearly some benefit from increased trade thanks to the spending of holidaymakers, but does this increased income cover the additional external costs?
A’level economics students frequently moan that what they have been taught is not relevant to what is going on around them while economics teachers complain that students do not relate what they have been taught to the real world!
The recent events at Port Talbot provide an ideal example to use economics concepts.
The multiplier can be used in assessing the costs to the area should Port Talbot close since not only will steel jobs be lost if the plant closes, additional jobs will also be at risk as steel workers suffer lower disposable income and cut back on expenditure, particularly in non-essential areas.
In considering the type of unemployment created, one can use the idea of structural unemployment since many of the steel workers affected will not have the skills needed in newer, growing industries.
The possible closure of the plant is relevant to the arguments about the benefits of free trade and the theory of comparative advantage whereby UK steel purchasers benefit from cheaper steel imports from China which need to be set against the job losses among UK steel producers. This aspect can be expanded to consider whether the Chinese are dumping steel on the world market and, if so, what action should be taken, especially in the light of the tariffs on Chinese steel imposed by the USA and those imposed by China on imports of steel from the EU and elsewhere.
A final example is in the field of market failure where Tata have complained that the UK Government’s environmental policies have raised energy prices and helped make UK produced steel (and heavy industry generally) uncompetitive. UK electricity prices are almost double those in the rest of the EU and more than double those in China and while these high prices help to subsidise renewable forms of energy, they make life difficult for UK firms.
A report in today’s Independent newspaper suggests that the cost of legal advice from one of small number of well known firms in the UK, collectively known as the “Magic Circle”, has risen by around 100% in real terms since 2003. The market structure for this industry seems to display all the hallmarks of an oligopoly, and one which might tend towards some form of collusion; demand is inelastic, there are a small number of interdependent firms and customers have difficulty collecting good information about substitutes.
In addition, beyond these largest firms a form of price leadership structure may be in operation. As these large firms ratchet up their charges smaller firms outside the Magic Circle take the opportunity to increase their fees in a clear example of what is commonly referred to as Stackelberg equilibrium. The economic rents enjoyed by these firms in the form of supernormal profits may be quite considerable.
The question is, as economists should we care, and if so, what can be done? The availability of good legal advice at a reasonable price may well have positive externalities as it protects the functioning of a market economy and also allows smaller firms to compete in all markets with larger ones as they do not face the barrier to entry in any market of very high legal costs associated with operating in the market. In short, high legal costs may make a host of markets much less contestable.
This suggests some government action is necessary. Everyone with a knowledge of economics should be able to recommend lots of policies to make any given market more competitive, and the market for legal advice is no exception. A reduction of barriers to entry, a requirement for transparency in pricing, an investigation into possible anti-competitive practices and the use of large fines for those found guilty might all be relevant. However, as we have seen in the energy market action by consumers may also be needed. A willingness by customers to shift their business to cheaper firms and an attempt to make firms move to a fixed price model by supporting those firms which do will certainly give the Magic Circle something to think about.
Ultimately, a combination of government action and consumer action will be needed but nobody should be under any illusion; the legal profession generally and the “Magic Circle” will fight against it tooth and nail. Economic history suggests that those enjoying economic rent seldon give it up easily.