In order to reduce the high levels of greenhouse emissions, as well as satisfying Australia's "Kyoto target" obligations, the government has put forth legislation that would fine retailers who "do not meet the [pollution] target".

1.        Where a market system causes under or over allocation of resources to a certain economic activity.

The Government, by introducing the fines, is hoping that this negative externality is reduced. This is as the retailer would be encouraged to reduce greenhouse emission via methods such as tree planting, or even looking at alternatives in energy production. Moreover, if the retailer exceeds its limit then they will be paying a fine for the negative externality; this fine of $15 per tonne of carbon dioxide acts very much like a tax. Ideally, the amount of the fine should equal the social cost of the pollution. Fig. 1.

Fig.1

Fine.

The market is currently supplying at price P1. This is the privet equilibrium point. If the social cost is taken into account, the equilibrium moves to quantity QS and price PS. By imposing a fine that acts like a tax, the government would be hoping to shift the equilibrium to this socially optimal point. The new equilibrium point is at quantity QS and at price Pt. Here the socially optimum quantity is being supplied but at the higher cost of Pt..

Such a fine is designed to penalise the retailers for the pollution they are causing, however, this may not be the case. We humans have come to be dependant on energy, thus, no matter what happens we need it.  This means price inelastic in demand. By this we mean that the demand of energy is not responsive to price. Thus, as the fine works much like a tax, it will just be passed on to consumers, leaving retailers unaffected. See Fig. 2. So ultimately, the price of the energy has gone up, and the quantity hasn’t decreased much.

Fig.1

Fine

The demand curve is inelastic. When the tax in imposed the new equilibrium point is at quantity Q1 and price P1. The Quantity has only decrsed marginally but price has dramatically increased to P1.

It is obvious that the government must do something to fix this form of marketing failure. However, this fine may not be the best solution as, just like a tax, it is likely to be passed onto consumers. Furthermore the problem of producing a necessity that is too highly priced for Low-income groups will have a regressive impact on the distribution of income. A better alternative for the NSW government would be passing on subsides for retailers not producing greenhouse emissions or retailers who are employing the use of renewable energy to solve this problem.

Commentary word count:  450 words.