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Market Failure in Beijin's Economy

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Introduction

Article: "Far From Beijing's Reach, Officials Bend Energy Rules" - Economics Commentary - The average country becomes rich through industrialization and expansion of its diverse industries and once affluent, faces the cost of the inevitable denouement of the pollution created in the process. The exception to the rule however exists: China. Although the country hasn't reached the stage where it can be considered "economically prosperous", it is facing the biggest environmental issues ever known. Hence, no country known to men has ever emerged as an industrial world power without leaving behind millions of tones of pollution in the process, for the demand for energy is nowhere higher than in a country with a booming economy. And China, with its 11% growth rate as of 20071, is no exception to this rule. China's main energy source is coal; the dirtiest of all types and the main responsible for the gray skies, polluted waters, poisonous air and average one million deaths every year2. ...read more.

Middle

Moreover, the policy refrains small to medium-size factories from purchasing newer, more efficient machines that meet the new requirements as their revenues decrease with a price-increase. Hence, only the smaller companies are put out of business, raising unemployment, social unrest, instead of decreasing consumption. Likewise, the government has limited the amount of new coal-burning plants to decrease coal production and gain further lost welfare (see diagram above). However, the western provinces rely entirely on the local heavy industry (the most energy-consuming type of industry) as they lack most natural resources, with the exception of coal. Again, the limiting of such industries in these provinces is causing massive unemployment and tension between the local and Beijing governments; thus overall, the lost welfare of society is not fully regained by Beijing's policy (see diagram above). Furthermore, the raise in the price of electricity as a way to internalize the negative externality of pollution is, in fact creating itself new market failures, for example: black markets. ...read more.

Conclusion

The new policy brings out China's difficulty to impose a drastic change on such a large country and enhances the country's weakness in assessing its regions' industries and their capabilities. Hence, the policy which should in theory solve the market failure created in reality only generates further market failures and fails to solve the issue of pollution. Sources: "Far From Beijing's Reach, Officials Bend Energy Rules" New York Times (November 24th, 2007) http://www.nytimes.com/2007/11/24/world/asia/24evaders.html?pa_=slogin "Choking on Growth" New York Times (December 17th 2008) http://www.nytimes.com/2007/12/29/world/asia/29china.html?_r=1&oref=slogin "China's Growth is Not Fully Dependent On Exports" The Economist (January 5th 2008) "Why China Could Blame its CO2 on the West" New York Times (December 17th 2007) 1 "China's growth is not hugely dependent on exports" The Economist (January 5th, 2008) 2 "Why China may blame its CO2 on the West" New York Times (December 17th 2007) 3 Community surplus: the welfare of society; = consumer surplus + producer surplus 4 Market failure: when resources aren't allocated in an optimal manner; community surplus isn't being maximized 5 "Chocking on Growth" New York Times (December 17th 2008) http://www.nytimes.com/2007/12/29/world/asia/29china.html?_r=1&oref=slogin Agustina Albassini 11th A Economics HL January 22nd 2008 1 ...read more.

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