Should The Australian Government Prevent Climate Change?

The climate is changing dramatically nowadays to a point that it has affected the world economy. This is due to the significant increase in human activities such as the burning of fossil fuels which are coal, oil and natural gases, agriculture activities, and deforestation (Australian Government n.d.). Therefore solutions to the climate change are needed in order to bring economic benefits.

Government will intervene the competitive markets when there are market failures. Market failure refers to a situation in which the market fails to allocate resources efficiently on its own (Gans et al. 2015). Some examples of market failures are bounded rationality, asymmetric information, transactions cost, externalities, public goods, imperfect competition and inequality. Government will intervene through public policy solutions to correct these market failures.

There is an externality when an activity conducted by an individual has positive or negative side-effects on third parties which are not accounted for in the price of the activity.

The market equilibrium is not efficient because there is externality (Gans et al. 2015). This is because people ignore the external effects of their actions when deciding how much to demand or supply.

Climate change is the negative externality as the emission of greenhouse gases has adverse effect to the bystander. Most of the firms do not care about the carbon pollution created in their production process and the consumers, too do not concern about the pollution that causes by their consumption (Gans et al. 2015). They tend to ignore the consequences of climate change as they do not own the global atmosphere (Freebairn 2007). Hence the government will have to intervene to limit the emission of greenhouse

gasses.

Graph showing negative externalities in production.

Graph showing negative externalities in consumption.

Graphs above show the cost to society of producing and consuming a good. Examples of production that will leads to pollution are agriculture and manufacturing industry and examples of consumption that worse off the pollution are cigarettes and automobiles. These goods purchase by consumers are also called merit bads. Merit bads are goods or services that government think people ought not to consume irrespective of tastes or incomes. In the free market, people over consume merit bads.
Hence, government would need to intervene in these issues of climate change when the market equilibrium is not efficient which due to the failure to maximize the total benefit to society as a whole (Gans et al. 2015). They will need to take the responsibility to reduce the severe consequences of climate change.

Question 2
Tragedy of the Commons is a parable that illustrates why common resources are used more than is desirable (Gans et al. 2015). It explains why are the markets do not protect the environment. The pollution is becoming worse as rational people only concern about their own benefits rather than the society welfare. This negative externality results in a market failure. Therefore a country’s government have to take actions to correct the market failure, which is the climate change, with public policy solutions. Government can combat this issue if the pollution is within its own country.
The global warming is often caused by the emission of greenhouse gasses. The emission of greenhouse gasses in every country has contributed to the climate change. Government could limit the emission by enforcing regulations to the emitting industries. This can be a benefit to the market and the environment despite how the emissions affect the other countries.
The government could not solve the pollution across other nations. For instance, it could not imply a corrective tax on polluters in another country (Gans et al. 2015). To solve this problem, the nations could commit into a treaty to reduce their emissions (Gans et al. 2015).

Question 3
Sometimes, the related parties fail to solve the externality problem. This might because of the expensive transaction costs. Transaction costs are the costs of using the market, which is the costs that parties incur in the process of agreeing and following through on an exchange. Thus an individual government will intervene to correct the market failure which caused by the externality. The government can take public policy solutions to combat climate change.
Firstly, the government can regulate certain activities that pollute the environment. This is a command-and-control policy where government will prohibit certain activities. The benefit of this solution is that government can forbid, limit or mandate certain activities. For example, it can require a firm to install a particular technology to reduce the emission of greenhouse gasses. However, it is difficult to prohibit a certain activities. For instance, all kinds of transport cause pollution. Yet it is impossible for government to ban all transport (Gans et al. 2015).
Government can also enforce market-based policy to align private incentives with social efficiency. One of the policy is implying corrective taxes and subsidies. Corrective taxes are taxes enacted to correct activities that have negative externalities while corrective subsidies are given to activities that have positive externalities. The advantages of corrective taxes are they increase government’s revenue and economic efficiency (Gans et al. 2015). The disadvantage is that government needs to conduct many researches in order to set the right tax rate (Mankiw 2007).
The second market-based policy is tradable pollution permits. They allows firms to trade the right to emit specific amount of pollutants (Beder 2001). The advantage of it is that it makes the two firms involved better off as they are voluntarily agreeing to it (Gans et al. 2015). In the meantime, the economic efficiency is also improved because the firms are able to maximize their profit while keeping the cost of pollution control at the minimal (Dahlberg n.d.). However, it creates an entry barrier for new firms to enter the industry, hence discouraging competition. It also create disputes as some firms would argue that they believe they should receive larger amount of permit (Tom 2010).
As a conclusion, government should implement public policy solutions when private solution could not solve the issue of climate change.
Question 4
There are many cost-effective ways for us as private individuals to combat climate change.
First, we could reduce the use of automobiles. Motor vehicles is the largest contributor to air pollution in the world (EPA Victoria n.d.). Public transports such as busses and trains are alternative ways to travel. We could also reduce the need for driving by using travel efficiency measures such as commuter, biking, and pedestrian programs (EPA n.d.).
If we must use automobiles, we could buy fuel-efficient, low-greenhouse gas vehicle. For instance, electric or hybrid automobiles generate energy from lower-carbon or non-fossil fuels (EPA n.d.). We could also use renewable fuels such as E85 and biodiesel (EPA n.d.) to reduce carbon emission.
Besides, we could purchase energy-efficient appliances. An example is compact florescent bulbs, which use less energy than standard light bulbs (The Town of East Gwillimbury n.d.). We could also reduce greenhouse gas emissions by switching off electronics when not in use, instead of leaving them idle.
Reduce, reuse, and recycle is also another effective way. Some examples are printing double side and recycling newspapers and cans, and more.
Lastly, we could spread the importance of reducing greenhouse. However these steps are not effective if there are only a few of people doing it.