Microeconomics Commentary - IB Economics SL IA

School Code 002189

Name of School Global Jaya International School

Candidate Name

Keshia Saradima Indriadi

Candidate Number

Title of the article

Time China got serious on pollution

Source of the article

The Financial Times

Date the article was published

March 3, 2014

Date the commentary was written

March 28, 2014

Word count

748 words

Section of the syllabus the article relates to

Section 1: Microeconomics

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The Financial Times March 3, 2014 6:11 pm

Time China got serious on pollution Beijing must tackle ‘dirty rats’ as well as corrupt ‘tigers’ and ‘flies’

T

he great thing about air pollution is that you can see it.

After years of ignoring the thickening smog around them – or dismissing it as an inevitable consequence of rapid growth – more and more Chinese are clearly worried. Last year’s “airpocalypse” was a turning point. PM2.5 fine particulates reached levels 70 times those considered safe in the west. Dangerously high levels of smog returned last month. In recent years there have been public protests against chemical factories and toxic waste spills throughout China. Even parts of the state media have taken to reprimanding local officials for failing to meet their own clean-up targets. There are tentative signs too that President Xi Jinping’s administration is more serious about the problem. It appears to have concluded that pollution is a potential cause of mass discontent. Decreasing pollution also fits with its policy of improving the quality of growth by rebalancing the economy towards consumption. Mr Xi has let it be known that local officials will from now on be judged not purely by economic growth but also by improvements to the environment. If this is implemented, it marks progress. The government is also demanding real-time data from 15,000 heavily polluting factories. In his first year in office, Mr Xi has consolidated power and driven through an anti-corruption campaign with great ruthlessness. He could plausibly do the same against pollution. Yet there are serious limits to what can be achieved. First, the use of coal, the biggest cause of bad air quality, will almost certainly increase, not diminish. True, China is planning 28 nuclear power stations to add to the 20 already in operation. Moreover, it intends to step up use of gas and 2

hydroelectric power, itself not exactly environmentally costfree. Even so, China’s main coal body is projecting a near-40 per cent jump in use by 2020. Second, China may merely displace pollution, not tackle it (just as the developed world has outsourced much of its pollution to China). The government has called for polluters to move to the west of the country, hardly a sustainable solution. Much of the air pollution that drifts across Beijing comes from Hebei province, which has now started to close outmoded steel mills. The result is far worse pollution in Shanghai as mills in nearby Jiangsu province take up the slack. Third, smog is only the most visible environmental catastrophe. Soil pollution may be worse still – and more intractable. Many rivers are ecological disasters. Biodiversity has already fallen, probably never to recover. China has long talked about cleaning up the environment. If it is now serious, there are some things it can do. Top of the list comes enforcement of existing rules. If Mr Xi can clamp down on corrupt “tigers” and “flies”, he can surely do the same with “dirty rats”. As well as making it illegal to pollute, he can also make it more expensive. A carbon tax would be a bold move, one even western governments have struggled to implement. Here China’s centralised, command economy could be an advantage. In the long run, success will depend on China’s ability to improve the efficiency of its economic model. Improvements so far have been easily outpaced by an economy that has doubled in size every seven years. China needs rapidly to learn how to create more output from fewer inputs. Energy saving should become a priority. Of course, there is likely to be a cost. It is hard to see how China can clean up its environment without significant disruption to employment in polluting industries. The danger is that the leadership of the Communist party will conclude that it needs fast growth more than it needs clean air, clean soil and clean rivers. That would be a mistake.

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Commentary China’s overabundance of chemical factories and toxic waste spills has caused much harmful smog that poisons the air in major cities and endanger the health of their citizens. Fortunately, President Xi Jingping has recognized the severity of the issue and will start implementing several market and government based solutions soon.

Pollution is a negative externality, as illustrated by Figure 1, where the price of the firms’ factory productions is less than the cost it imposes on wider society. The factories would have their own private costs in order to produce their goods, but they are also costing society more, as the coal they burn is harmful to the environment and this is an external cost or negative externality 1.

1 Blink, Jocelyn, and Ian Dorton. Economics Course Companion. 4

Figure 1: Negative Externalities of Chemical Factory Production

China has got a major market failure situation as resources are being inefficiently allocated to harmful outputs and as a result community surplus is not maximized. There is a large amount of welfare loss in China (illustrated by the shaded triangle), which is a situation where MSB is not equal to MSC and society does not achieve maximum utility2. Factory goods are being overproduced since quantity should be optimum at Q* but it is at Q1 instead, and 22 "Welfare loss (Meaning of)." Encyclo - Online Encyclopedia. 5

therefore price should also be higher at P* if the firms were to properly internalize the costs of their negative externalities into their private costs.

One method suggested by the article that can reduce pollution by internalizing external costs into firms is through a carbon tax, which is a tax on businesses that produce carbon dioxide through their operations that is used to reduce greenhouse gases 3. In Figure 2, the marginal external cost is the difference between the MSC and MPC and would be the amount taxed on firms, an amount that is proportional to how much carbon they emit. The welfare loss triangle should get smaller and smaller as firms start to internalize their cost due to the tax and MSC will become MPC + Tax. Price will increase and so demand decreases as well, letting the price and quantity reach socially optimum levels (at P* and Q*) and correcting the previous market failure.

33"Carbon Dioxide Tax." Investopedia. 6

Figure 2: The Effect of Carbon Tax on the Market of Chemical Goods

Though the article mentions that carbon tax has been difficult to implement in Western nations, this is where “China’s centralized command economy (i.e. all economic decisions are made by the government4) can be an advantage”; so they have greater control over companies and can impose taxes more firmly. Nevertheless, it 4 Blink, Jocelyn, and Ian Dorton. Economics Course Companion. 7

is difficult to accurately measure carbon tax and though the government is “demanding real-time data from 15,000 heavily polluting factories" this can prove to be a burden on the government instead. Taxes work well for the long-term though as they provide incentives, because when firms increase their prices, demand would decrease

and

environmentally

consumers damaging

would

be

less

inclined

products, though this

also

to

buy

has

a

drawback as it only applies to goods that are price elastic.

Another solution proposed by the article is to move polluters to the west of the country where pollution is less, though this is hardly a sustainable solution and would only work short-term. China is also planning 28 more nuclear power stations and increase use of gas and hydroelectric power, which could defer them from the more harmful coal as a source of energy but can still give rise to negative externalities nonetheless. The increased use of environmentally friendly technology would benefit society and especially in the longterm as it is a sustainable method but then again it isn’t environmentally cost free and expensive for the government to implement. However, China also has a large and still rapidly growing population to worry about and cutting back factory productions with taxes would likely cause unemployment as well.

“China needs rapidly to learn how to create more output from fewer input” (i.e. increase efficiency), as the article says, is the gist of the

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solutions that can be implemented by the Chinese government to correct the situation pollution has caused. Incentives are the key to long-term solutions for pollution, so perhaps the best solution is to implement carbon tax, which while a “bold” move can be done correctly with monitoring from the government. It would help also if China can invest in environmentally friendly means of production, such as hydroelectric or biogas, which could prove extremely beneficial in the future. Word Count: 748 words Works Cited 

Blink, Jocelyn, and Ian Dorton. Economics Course Companion. Second Edition ed. Oxford: Oxford University Press, 2011.



Print. "Carbon Dioxide Tax." Investopedia. Investopedia US, n.d. Web. 12 Mar. 2014. . "Welfare loss (Meaning of)." Encyclo - Online Encyclopedia. Encyclo

MMXII,

n.d.

Web.

12

Mar.

2014.

.

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