IGCSE Economics 0455: Money & Banking
More market failures
Crazy Captain
An oil tanker captain falls asleep at the wheel whilst delivering oil across the sea! The ship crashes and leaks oil into the ocean and is lost (which could have been used to make bags, plastic or fuel for cars). The ship cost millions in investment for the company! The crash kills 3 crew members and 1000’s of penguins, gulls and other sea life also, closeby! Sone of the oil washes onto the local shore, causing a mess of the beaches! Massive damage to the environment occurs!
The oil which is normally sold is hugely profitable. The ship loss has to be paid for, but luckily was insured!
What's what in the story?
Demerit good: The oil industry can be associated with environmental harm, such as pollution. This makes the oil product indirectly harmful to society, similar to demerit goods like cigarettes or alcohol.
External benefit: The sale of oil supports economic activities that benefit individuals and businesses. These are external benefits for consumers and industries relying on oil.
External cost: The oil spill causes severe harm to marine life, ecosystems, and potentially humans. These are the external costs borne by society and nature, not accounted for in the company’s operational costs.
Externalities (spillover effects): The oil spill represents negative externalities, as the company’s accident imposes costs on others (dead wildlife, environmental cleanup, reduced biodiversity).
Free rider: The insured shipping company benefits from public-funded environmental cleanups, often financed by taxpayers. Non-payers (like the company) benefit while others bear the cleanup cost.
Market failure: The crash illustrates a market failure, as the oil company fails to allocate resources efficiently. The societal costs of environmental destruction outweigh the private benefits of the oil trade, showing inefficiency.
Merit good: While not a direct part of the story, promoting alternatives like renewable energy (merit goods) could mitigate reliance on oil, reducing such risks and externalities.
Private benefit: The profitability of oil sales represents private benefits to the company.
Private cost: The company incurs the cost of ship investment and insurance but likely neglects the broader environmental costs.
Social benefit: The economic activity from oil sales contributes to employment and energy supply, benefiting society in some ways.
Social cost: The loss of life, destruction of ecosystems, and long-term environmental damage represent social costs that significantly outweigh the private costs.
Subsidy: If governments or public funds are used to support cleanup efforts, this could act as an implicit subsidy to the company by alleviating its financial burden for the accident.
Story #2 Downstream problems
In a quiet countryside town, a factory produces trendy clothing for the global market. The factory discharges untreated dyes into a nearby river, turning the water purple and toxic. Fishermen downstream lose their livelihoods, and residents fall ill after drinking contaminated water. Despite this, the clothing remains popular, and the factory earns record profits. The government hesitates to impose fines, fearing job losses in the region. Environmentalists stage protests, demanding stricter regulations and cleanup measures. Local cleanup efforts are funded by a charity, while the factory owner receives a government grant to “boost employment.” The factory dismisses the concerns as “necessary trade-offs for progress.”
- Using the story, which parts relate to the economic concepts of market failure?
Story #3 Running out of places for rubbish!
A tech company introduces cheap, disposable gadgets. Customers flock to buy them, but the devices break within weeks. Landfills overflow with discarded electronics, leaching harmful chemicals into the soil and water. Meanwhile, the company invests in flashy ads and expands production. Activists highlight the growing environmental cost, urging consumers to consider sustainable alternatives. The government remains silent, citing the gadgets’ contribution to the economy. Customers enjoy low prices but ignore the growing environmental consequences of their purchases. Recycling centers, overwhelmed by demand, call for subsidies to manage the mounting electronic waste.
- Using the story, which parts relate to the economic concepts of market failure?
KEY TERMS FROM THE CASES
