Market failure occurs when there is a misallocation of scarce resources through underproduction or overproduction leading to a less optimal result. In the case of externalities, there is a side effect that is generated from economic activities and yet fails to be reflected in the pricing of commodities. Resultantly, there is inefficiency and precision in determining the actual outcome of a production process. One of the sectors that are globally affected by market failure is greenhouse gas emission. There are many stakeholders involved in the sector hence understanding the economics of the industry can aid in knowing when there is a need for policy development, government response, or societal intervention.
Greenhouse gas emission (GHG) is set within a wide economic context as evident in the direct relationship between emission of CO2 and growth of the gross domestic product. The GHG is primarily set within the energy production sector, especially among developed countries (Cary 125). The agricultural sector is also responsible for the emission of these pollutants into the air. However, other industries such as factories and manufacturing also contribute to the negative externality. The negative implication of failing to control greenhouse gasses through policy considerations is that it leads to draught, interferes with the supply chain, and causes adverse weather conditions. Thus, the quantity of GHG emissions varies across subsectors but is more rampant in energy production.
Several stakeholders including the farmers, suppliers, producers, distributors, and customers are engaged in related processes that cause GHG emissions. The raw materials from agricultural farms are produced and supplied to the manufacturer for production then the retailers and wholesalers distribute the goods to customers or warehouses (Wiśniewski 3056). Notably, at each point of the supply chain, there are also drivers who transport either the finished goods or raw materials. Thus, multiple stakeholders involved across all industrial activities within the supply chain contribute to the emissions of the GHG.
The primary incentives for this externality are the income that energy production and agricultural production generate. The changes of relative market prices are a significant incentive for the stakeholders to withhold their privately-held information under given circumstances to fit their choices on production, sequestration, and consumption (Freebairn 401). For instance, some private companies may fail to account for their level of carbon emission to the air for fear of being taxed higher or poor branding from environmentalists. Moreover, the more GHG emission that a company produces the more they get profit due to increased production.
Noteworthy, externality in the context of GHG release is the negative outcome that is not reflected in the market price. For instance, the cost of producing energy from fossil fuels may be low when the air pollution that it causes is not accounted for. Similarly, a person using a greenhouse to produce vegetables may have good yields when compared to a farmer who uses traditional planting methods (OECD 164). However, the one with a better harvest does not include the harm that the agricultural approach used causes to the ozone layer. Since it happens outside the price mechanism the negative effect is uninternalized. Resultantly, such costs are paid for by third parties such as ordinary people who may develop bronchial diseases due to the high concentration of carbon monoxide.
The pure theory of public expenditures is a great underpinning for understanding the implication for externalities as a market failure. Specifically, the theory proposes that goods with a “double polar” feature of joint supply and difficulties in exclusion only allow for production in the context of public organization (Cowen 34). The implication is that the production of energy and agricultural products with extraneous effects place a burden on the people. Remarkably, about two-thirds of American citizens wish that the policies could be interpreted for them to enhance their understanding (Scott et al. par.1). The issue of GHG emission and the carbon tax policy that people are interested to know and understand. Thus, it is the responsibility of the government to assess and provide coping mechanisms for the production of the product.
The best policy interventions include carbon tax, educating business owners and agriculturalists on the effect of GHG. The objective of this policy is to ensure that there is reduced pollution of the air and that the people responsible for the damage of the ozone layer are held accountable. The policy on education is relevant as it allows people to adapt mitigatory measures instead of management. For example, a farmer can decide to adopt other methods of crop agriculture that do not use greenhouse. The implication is that GHG emissions will be reduced and the prices of goods in the market will reflect their actual cost of production.
In summary, GHG emission is a significant externality that affects several economic sectors such as energy, agriculture, manufacturing, and transportation. There is a long chain of stakeholders from the time of collecting the raw materials to their delivery as finished goods. Particularly, the producers, farmers, retailers, drivers are but an example of people who are responsible for the externality. Due to the negative effect on the public, it is the mandate of the government to formulate policies that will make the responsible persons accountable for the pollution they cause.
Works Cited
Cary, Michael. “Have Greenhouse Gas Emissions from US Energy Production Peaked? State Level Evidence from Six Subsectors.” Environment Systems & Decisions, vol. 40, no. 1, 2020, pp. 125-134.
Cowen, Tyler. Public Goods and Market Failures: A Critical Examinations. Transaction Publishers, 2019.
Freebairn, John. “A Portfolio Policy Package to Reduce Greenhouse Gas Emissions.” Atmosphere, vol. 11, no. 4, 2020, pp. 337-348. ProQuest, Web.
OECD. Making Better Policies for Food Systems. OECD Publishing, 2021.
Scott, Greg, and Tom Hashemi. “Think Tanks Must Accept the Power of the Public.” On Think Tanks, Web.
Wiśniewski, Tomasz. “Simulation-Based Analysis of Greenhouse Gas Emissions in Sustainable Supply Chains—Re-Design in an Approach to Supply Chain Strategy.” Energies, vol. 14, no. 12, 2021, pp. 3504-3512.