Market Failure: Externalities & Common Pool (Access) Resources (DP IB Economics: HL)

Text B, paragraph 1

Over the past 20 years, Indonesia’s air quality has become increasingly worse, from one of the cleanest countries in the world to now sitting in the top 20 for most polluted. The most significant spike happening in the last 3 years is attributed to intense forest fires, transport and large-scale construction as the economy has developed. The wider impact from high air pollution is beginning to be felt, with life expectancy predicted to be cut by 1.2 years if pollution levels remain at the current level.

Text A, paragraph 6

Ghana is the 2nd largest recipient of FDI in Africa, with $2.65 billion worth of FDI recorded for 2020 and $2.6 billion in 2021. However, those opposed to FDI state that the short-term gain is outweighed by reduced labour protection. The government of Ghana should focus on protecting the overuse of common pool resources by MNCs, like previously protected freshwater lakes, reducing the sustainable use for future Ghanaians.

Extract A, paragraph 2

Overall, the fast fashion industry faces sustainability challenges:

• Fast fashion promotes a culture of overconsumption leading to excessive waste. 

• The production processes involve the use of toxic chemicals that contaminate water sources, harm ecosystems, and pose risks to human health. 

• The fast fashion industry has a significant carbon footprint; reliance on fossil fuels, energy-intensive processes, and long supply chains contribute to greenhouse gas emissions and climate change.

Fast fashion refers to the production and retailing of trendy clothing items at a rapid pace and low cost. Some popular fast fashion chains worldwide are ASOS, H&M, Shein, Uniqlo & Zara.

Cotton plays a prominent role in the production of fast fashion garments. India is the world's largest producer of cotton. 

The market for cotton in India is perfectly competitive. Figure 1 illustrates the average cost (AC) and marginal cost (MC) curves of Firm A, a typical Indian farmer, operating in the cotton market. The market price of cotton is $18 per kg.

Cotton is a water-intensive crop. According to the WWF it takes more than 20,000 litres of water to produce just one kilogramme of cotton. The demand for cotton in the fast fashion industry contributes to increased cotton production worldwide and is thus responsible for the negative impact on water resources.

Still, there are countries that heavily subsidise their cotton farmers so that they are able to meet the high global demand. 

The United States has implemented subsidies and support programmes for cotton farmers. Under the Cotton Transition Assistance Program (CTAP) the U.S. government pays $0.03 per kg of cotton while 8.3 billion kgs of cotton were produced in 2021 in the U.S.

Overall, the fast fashion industry faces sustainability challenges:

• Fast fashion promotes a culture of overconsumption leading to excessive waste. 

• The production processes involve the use of toxic chemicals that contaminate water sources, harm ecosystems, and pose risks to human health. 

• The fast fashion industry has a significant carbon footprint; reliance on fossil fuels, energy-intensive processes, and long supply chains contribute to greenhouse gas emissions and climate change.

Policies addressing the negative impacts of the fast fashion industry are being implemented:

• The European Union's REACH regulation and the United States' Toxic Substances Control Act (TSCA) aim to regulate chemical use in the textile industry. 

• Germany introduced the Green Button certification for textiles, which guarantees that products meet strict social and environmental standards throughout the supply chain.

• In an effort to raise awareness, in Japan the Sustainable Fashion Summit takes place, to educate the public about sustainability issues in the fashion industry and to promote sustainable practices. 

• On an international level, the United Nation’s Fashion Industry Charter for Climate Action initiative is encouraging companies to set targets to reduce greenhouse gas emissions and transition to low-carbon and circular business models.

Currently, indirect taxes early on in the production of fast fashion garments do not exist. Value-added taxes (VAT) or sales taxes on the retail price of clothing do exist, but these do not specifically target fast fashion. For instance, the average monthly spending per person on clothing in the UK is £76.53 while the VAT is 20%.

As a result of the risk of climate change and the associated costs, many economists agree that travel by rail, instead of plane or gasoline-fueled engine cars, should be promoted. However, even in Austria, the annual growth of passenger rail travel has slowed down to only 1.04% in 2021 compared to 5.85% in 2010.

Rail networks are considered an example of a natural monopoly. 

Many governments, including the Austrian government, have been promoting investments in the rail sector such as electrification and other sustainable technologies. These investments will increase Austria’s infrastructure and are expected to increase, both over the short-term but also over the long-term, Austria’s economic growth. 

The Austrian government is also considering implementing regulations that would require railway firms to part of any supernormal profits earned in upgrading the railway sector. Many members of parliament are sceptical.

Starting in January 2023  individuals in Austria can apply for a government subsidy up to €5,000 to buy an electric vehicle as part of the e-mobility scheme. The Federal Ministry for Climate Protection, Environment, Energy, Mobility, Innovation and Technology (BMK) has earmarked €95 million for 2023 alone, which is part of the government’s aim to drastically reduce carbon emissions from transport in Austria.

It has been argued that Austrian citizens who typically implement rational consumer choice would assess the costs and benefits of using their conventional gasoline-fueled cars and, as a result, would switch to alternative cleaner and more sustainable forms of transport. Unfortunately, many are still not.

To address mounting environmental issues the Austrian government is even  considering using consumer nudges to increase the use of cleaner and more sustainable forms of transport by Austrian citizens.