Negative Externalities of Production How does Mining New Zealand cause Market Failure?

Negative externalities of production. Consumer surplus SMC PMC By moving from Pfm,Qfm to Ps,Qs it is allocatively efficient as the total gain is greater than the loss .This clears out the deadweight loss but also clears out some negative spillover cost . Because this free market has negative externalities of production, it is NOT allocatively efficient. (PFM,QFM) SMC = PMC+ spill over costs. The spill over cost is shown in blue. Then when the total surpluses are shown, it is possible to determine the dead weight loss which is the remaining blue area. Total surpluses at the free market will not cover the spill over effect that have arisen from the negative externalities of production. Therefore operating at the free market with a negative externalities of production is not allocatively efficient because of the Deadweight loss. This diagram represents the free market for mining in New Zealand national parks. The area in orange represents the total surpluses which shows it is an allocatively efficient market WHEN there is no negative externalities of production. Total surpluses Deadweight loss PS Qs PFM Area gained from moving to Qs Producer surplus Spill over PMB QFM

SMC PMC In this graph where the market is operating at Qs and Ps the spill over effect are covered by the total surpluses. Therefore this market is allocatively efficient PS Qs PMB

Policy one: Mining in New Zealand national park with Sales Tax on Mineral goods On the Consumers side, because the price of mineral goods has increased, consumers consume less mineral goods from Qfm to Qs. (law of demand) PMC PMB When the Government imposes sales tax on Mineral goods, this creates a dual price movement. Because the market has now moved to a socially desirable position, the spill over effect gets internalized by total surplus by the two participants. Total Surplus PMC+TAX Producers will increase its price from Pfm to Ps so it can pass some of the tax burden to consumers. However, the revenue they receive goes down from Pfm to Ppr. (due to government taking away producers revenue.) because the price they recieve decreases, producers will decrease its quantity supplied to Qs (law of Supply) Therefore, Pfm moves to Ps, Qfm moves to Qs. Successfully moving to socially desirable position, eliminating the dead weight loss Eliminated spill over effect DWL Ps Qs Spill over effect Pfm Qfm Ppr

Is it Equitable? Horizontal Vertical producers who produce minerals OUTSIDE the New Zealand National Parks also get taxed as Sales tax taxes all the mineral goods, which is unfair since government’s main objective is to penalize the miners who mine inside the New Zealand National Parks, making it horizontally inequitable. It is vertically inequitable as because price of minerals increase, the poor people are more heavily affected than the rich people. Because their limited amount of income, the increased price of the mineral goods will decrease the poor people’s consumption or even miss out as they simply cannot afford to buy it anymore. (Note that some of the minerals like coal are a necessity for poor people for cooking and heating. Poor people could may not able to buy.)

Policy two: Mining in New Zealand national park with “Compulsory underground mining in national parks” Regulation Because the cost of production has increased,(new machine and training workers to work underground) they will decrease the supply. (Determinants of supply) This will cause supply curve to shift left PMC PMB SMC=PMC1 Now the market is operating at the socially desirable position, eliminating the dead weight loss and the spill over cost. To cover the new increased cost of production, producers will increase the price of the minerals from Pfm to Ps Because the price has increased, consumers respond by decreasing quantity consumed, falling from Qfm to Qs. DWL PS Qs Spill over Effect Pfm Qfm

Is it Equitable? Horizontally Vertically It is also vertically equitable because poor people or rich people will not get affected. Because this regulation ONLY targets producers who mine in National Parks, the producers who don’t mine in national park’s price will be the same. Thus even though the price of the mineral mined from national park increase, consumers can simply switch consuming minerals to that has not been mined on national park, which is relatively cheaper. To compete with this price, producers who mine on national parks will not increase its price or there will be a small price increase which will not hinder consumer’s buying power. This is vertically equitable. The compulsory underground mining is equitable (horizontally) as only producers who mine minerals in national park will get penalized and producers who doesn’t mine in national park will not get penalized

Conclusion: which policy is the best?? “Compulsory underground mining in national parks” Regulation It give the right idea to the producers to avoid mining minerals in the national parks in New Zealand or else they will be penalized Why? Just as efficient as Sales tax on mineral goods It is horizontally equitable It is vertically equitable

Created by Chunghee Lee THE END Created by Chunghee Lee