YEW CHUNG INTERNATIONAL SCHOOL HONK KONG

YEAR 12 ECONOMICS 2014 2015 STANDARD LEVEL

TOPIC 1.4

MARKET FAILURE

THE MEANING OF MARKET FAILURE

TYPES OF MARKET FAILURE:

-

THE MEANING OF EXTERNALITIES

NEGATIVE EXTERNALITIES OF PRODUCTION AND CONSUMPTION

POSITIVE EXTERNALITIES OF PRODUCTION AND CONSUMPTION

LACK OF PUBLIC GOODS

COMMON ACCESS RESOURCES AND THE THREAT TO SUSTAINABILITY

TOPIC ONE PART 1.4:

MARKET FAILURE

1. Explain market failure in terms of

economic efficiency (allocative efficiency)
technical efficiency (technical efficiency)
2. Explain market failure in terms of
Positive and negative externalities, with appropriate diagrams
Short-term and long-term environmental concerns, with reference to sustainable development
Lack of public goods
Under-provision of merit goods
Over-provision of demerit goods
Abuse of monopoly power
3. Explain possible government responses to market failure in terms of
Legislation
Direct provision of merit and public goods
Taxation
Subsidies
Tradable permits
Extension of property rights
Advertising to encourage or discourage consumption
International cooperation among governments

THE MEANING OF MARKET FAILURE:

Analyse the concept of market failure as a failure of the market to achieve allocative efficiency, resulting in
an over or under allocation of resources (i.e. an over or under provision of a good).
Market
Forces

Definition: Market forces are the forces of demand and supply that interact to determine the market
equilibrium price and quantity.
In a perfectly competitive market there exists:
- consumer sovereignty
- perfect information
- perfect mobility of resources
- no exogenous forces.

Consumer
sovereignty

This is the principle that consumers are free to make their own decisions about which goods and
services best satisfy their needs and wants. Consumers choices determine what is produced as
consumer choice will impact on market forces which affect market price. Producers will respond to
price signals, allocating resources to the production of goods and services which are relatively
mor4e profitable, i.e. which consumers desire.
PRIVATE PREFERENCES:
Private preferences efers to what goods/services consumers want. They do not take into account
social benefits and costs, i.e. externalities

Perfect
information
Perfect
mobility
Exogenous
force
Allocative
(economic)
efficiency

Market
failure

This is the idea that all producers and consumers have total knowledge about the market which
enables them to make sensible decisions about the use of resources or purchases. In reality this does
not happen, e.g. a consumer may be unaware of the pollutants discharged in the production of
bleached paper tissues.
This is the idea that resources, regardless of geographical or occupational location, are free to move
(be allocated) to the production where they are most efficiently used. In reality this does not happen,
e.g. not all workers can relocate to places offering employment.
These are forces OUTSIDE the market (buyers and sellers) that affect market price and/or market
quantity, e.g. government intervening in the market
Definitions:
1. The output combination where it is not possible to make someone better off without making
someone else worse off.
2. The output combination consumers desire produced at the lowest possible cost (as shown on a
production possibility curve).
3. The combination of goods and services which maximises societys well being.
Allocative efficiency in the market for a single, private good occurs at equilibrium, i.e. where the
sum of the producer and consumer surpluses is maximised.
N.B. produced at the lowest possible cost means it is productively efficient: all available resources
are being fully utilised, given the current state of technology.
Definition: Market failure occurs when the conditions for the market system to work perfectly are
not met so the price system will NOT achieve allocative (economic) efficiency: more (or less) is sold
at a lower (or higher) price than is allocatively efficient/ socially desirable.
Resources are being allocated inefficiently: they are either over or under allocated by the private
market.
With market failure there is a loss of net welfare, i.e. a dead weight loss at private market
equilibrium.
Market failure arises with:
Externalities
Merit and demerit goods (under-provision of Merit goods; over-provision of Demerit goods)

 Public goods (lack of provision of public goods)

TYPES OF MARKET FAILURE:
- THE MEANING OF EXTERNALITIES
- NEGATIVE EXTERNALITIES OF PRODUCTION AND CONSUMPTION
- POSITIVE EXTERNALITIES OF PRODUCTION AND CONSUMPTION
- LACK OF PUBLIC GOODS
- COMMON ACCESS RESOURCES AND THE THREAT TO SUSTAINABILITY

DESCRIBE THE MEANING OF EXTERNALITIES AS A FAILURE OF THE MARKET TO ACHIEVE

THE SOCIAL OPTIMUM WHERE MSB = MSC.
Marginal private
benefit [MPB or
MB]

Definition: This is the extra benefit to the individual consumer of consuming one extra unit of a
good.
It is the change in total benefit when another unit of a good is consumed.
Marginal private benefit relates to private preferences for individual consumers.

MARGINAL
SOCIAL
BENEFIT
[MSB]
Explain the
concepts of
marginal private
benefits (MPB);
marginal social
benefits (MSB)

Marginal private
cost [MPC or
MC]
MARGINAL
SOCIAL COST
[MSC]

Definition: This is the private benefit to the individual PLUS the spill-over benefit to third
parties (people who are not part of the action) of consuming one extra unit.
MSB = MPB +

(positive/negative externality of consumption) to society

MPB/ MSB
$

Positive externality
of consumption
MPB MSB
Negative externality
of consumption
MSB

Quantity
This graph shows that if there are externalities of consumption the MB curve will shift.
For positive externalities of consumption the MB curve shifts to the right: For negative
externalities of consumption the MB curve shifts to the left.
MSB = MPB + externality per unit
Definition: This is the marginal (extra) costs of production to firms of producing one extra unit.
It is the change in firms total cost when another unit of a good is produced.
Definition: This is the marginal costs of production PLUS spillover costs to third parties
(society) of producing one extra unit.
MSC = MPC +

(positive/negative externality of production) to society

MPC/ MSC
$
Explain the
concepts of
marginal private
costs (MPC) and
marginal social
costs (MSC)

Positive externality
of production
MPC MSC
Negative externality
of production
MPC MSC

Quantity

This graph shows that if there are externalities of production the MC curve will shift. For
positive externalities of production the MC curve shifts to the right: For negative
externalities of production the MC curve shifts to the left.
MSC = MPC + externality per unit
Social Optimum
MSB = MSC
Describe the
menaing of
externalities as
the failure of the
market to
achieve the
social optimum
where
MSB = MSC

Net Welfare
Loss

Definition: This is the socially optimum market situation that takes into account the social
benefits and costs to society so that MSB = MSC. The market reflects the socially desirable
price and quantity.

The above graphs show that at the private equilibrium (where MPC = MPB) the price is PP
and the quantity QP. If there is a positive externality, e.g. of consumption, society will want
us to consume more (QS) at a lower price (PS). If the externality is negative society will
want us to consume less (QS) at a higher price (PS).
Definitions:
This is a loss in net welfare/allocative efficiency resulting from operating at the free market
(private) equilibrium rather than the social equilibrium.

MARKET FAILURE:NEGATIVE EXTERNALITIES OF PRODUCTION AND CONSUMPTION

i. Examples
ii. Diagrams
iii. Welfare loss
iv. Demerit goods
v. Evaluate policy responses to the problem of negative externalities.

EXTERNALITY
= SPILLOVER
EFFECT
= UNINTENDED
SIDE EFFECT

Definition: This is an unintended side effect that results from production or consumption of a
good, affecting some party other than the consumer and/or producer of that good.
They can be
- positive (beneficial effect to the unintended party) or
- negative (harmful effect to the unintended party).
They can arise from
- Consumption
- Production
The free market does not take into account externalities so where there are externalities the free
market will not achieve allocative efficiency, i.e. will not achieve the socially desirable price
and quantity, economic efficiency. There will be market failure.
(Too much/little of a good will be produced/consumed at a higher/lower price than is socially
desirable. Resources are either under or over allocated by the private market.

Internalising an
externality

Definition: This involves a government action to achieve the socially desirable equilibrium.
When externalities are internalised the market reflects the SOCIAL PREFERENCES, i.e. the
SOCIAL BENEFITS and SOCIAL COSTS of production and/or consumption.
Government intervenes in the free market to internalise externalities
by:
either - making those responsible for creating negative externalities responsible for the costs
or - compensating those responsible for creating positive external benefits.
Government can do this through:
- indirect taxes
- establishing property rights
- subsidies
- regulation (laws)
- public provision
- publicity statements, campaigns (e.g. press releases; speeches)

NEGATIVE
EXTERNALITY
OF
PRODUCTION
Explain, using
diagrams and
examples, the
concepts of
negative
externalities of
production, and
the welfare loss
associated with
the production of
the good/service

Definition: This is an unintended negative/harmful side effect to others/society that occurs due
to production by a firm.
These are also called Spill-over costs or Social costs or External costs of production
Examples:
climate change brought about by the emission of green house gases from production
damage to health caused by air pollution from factories
Soil depletion and erosion caused by deforestation
Species extinction due to over fishing by commercial fishing firms
The free (private MPB=MPC) market will not achieve allocative efficiency. In the free market
more of these goods will be produced at a lower price than is socially desirable.
The Marginal Social Cost (MSC) curve is to the left of the Marginal
Private Cost curve (MPC).
The vertical distance between the MSC and the MPC is equal to the
externality per unit.
Market:

Private price = Pp
Socially desirable price =

Private quantity = Qp
Socially desirable quantity = Qs
= pareto quantity
Negative externality per unit = vertical distance between MPC and MSC
Loss of welfare benefit (dead-weight loss) in the private market= area shaded
(The private market is not allocatively efficient)
This graph shows that with a negative externality of production the MSC at each unit of output
is more than the MPC. The private market does not reflect the negative externality. The MSC is
to the left of the MPC. The socially desirable price Ps is higher than the private price Pp. At the
Ps

social equilibrium less is produced (Qp moves to Qs) at a higher price.

NEGATIVE
EXTERNALITY
OF
CONSUMPTION
Explain, using
diagrams and
examples, the
concepts of
negative
externalities of
consumption, and
the welfare loss
associated with
the consumption
of the
good/service

Definition: This is a harmful side effect to others/society that occurs due to consumption by
an individual.
These are also called Spillover benefits or Social benefits of consumption
Examples:
Health problems caused by the inhaling of second-hand cigarette smoke
Traffic congestion at peak hour caused by people driving their private vehicles to work
Injury and deaths caused by driving too fast and dangerously
The free market (private market MPC=MPB)will not achieve allocative efficiency. In the free
market more of these goods will be consumed at a lower price than is socially desirable, i.e.
resources will be over allocated.
The Marginal Social Benefit (MSB) curve is to the left of the Marginal Private Benefit curve
(MPB). The vertical distance between the MSB and the MPB is equal to the
externality per unit.
Market:

Private price =
Private quantity =
Socially desirable price =
Socially desirable quantity =
Negative externality per unit =
= pareto quantity
Loss of welfare benefit (dead-weight loss) in the private market=
(The private market is not allocatively efficient)
This graph shows that with a negative externality of consumption the MSB at each unit of
output is less than the MPB. The MSB is to the left of the MPB. The socially desirable price
Ps is higher than the private price Pp. At the social equilibrium less is produced (Qp moves
to Qs) at a higher price.
DEMERIT
GOOD
Explain that
demerit goods are
goods whose
consumption
creates external
costs
(i.e. a negative
externality of

Definition: This is good that society/ government considers harmful for us to consume and
will discourage the consumption of this good. Demerit goods usually have negative
externalities of consumption.
Examples:
Smoking (consuming) cigarettes
Dangerous weapons, e.g. pistols; automatic guns
Hard drugs e.g. cocaine
Fast and dangerous driving; drunk driving
Demerit goods are likely to be OVER-PROVIDED by the free market system, i.e. the
socially desirable optimum is not equal to the private market equilibrium. Therefore, demerit

consumption)

goods are an example of market failure.

Methods Government uses to decrease production and discourage consumption of
demerit goods:
Indirect taxes (e.g. on cigarettes and alcohol)

INDIRECT TAX
Evaluate, using
diagrams, the use
of policy
responses,
including market
based policies of
taxation, to the
problem of
negative
externalities of
production and
consumption.

Regulations and laws (e.g. speed limits and blood/alcohol limits when driving;)
Publicity campaigns/advertising

Definition: this is a tax on goods/services (tax on spending), collected by firms and passed on
to Government.
This increases the costs that firms have to meet so decreases supply (less is supplied at each
price level). The market price rises and the market quantity falls.
An indirect tax is a market-based policy that can be used to internalize negative externalities
of both production and consumption.
Once the externality is internalised the market equilibrium will reflect the socially desirable
price and quantity. Economic efficiency will be achieved.
1.Negative Externality of Production

Private price =
Private quantity =
Socially desirable price =
Negative externality per unit =

Indirect Tax per unit =

Gain in welfare benefit =
Socially desirable quantity =
= pareto quantity

This graph shows that if an indirect tax equal to the negative externality is imposed in a
market with negative externality of production, the market price will rise and the
market quantity will fall. Less will be produced/consumed at a higher price. Producers
will receive a lower price (Pp to P2) as they now need to pay the tax (Ps P2) to the
government.
2. Negative Externality of Consumption

INDIRECT TAX

Private price =
Negative externality per unit =
Private quantity =
Indirect tax per unit =
Socially desirable price =
Gain in welfare benefit =
Socially desirable quantity =
This graph shows that if an indirect tax equal to the negative externality per unit is
imposed in a market with negative externality of consumption, the market price will rise

(Pp to Ps) and the market quantity will fall (Qp to Qs). Less will be produced/consumed
at a higher price. Producers will receive a lower price (Pp to P2) as they now need to pay
the tax (Ps P2) to the government.

Evaluating the
use of an indirect
tax to internalise
externalities

Advantages:
Consumers consumed less at a higher price
The net welfare benefit increases
Resources are allocated more efficiently the market moves closer to the output
combination society desires (i.e. allocative efficiency)
Government receives taxation revenue that can be used to reduce the harmful side
effects of production/consumption
Disadvantages:
Measuring the harmful effect (externality) is difficult in reality: the tax per unit might be
more or less than the actual externality per unit. Hence there may still be a loss of net
welfare benefit due to over or under taxation per unit.
It is difficult with some externalities to identify which firms/consumers are causing the
harmful effect (e.g. some cars emit more pollutants than other more efficient, clean cars)
- it is difficult to assess the extent of responsibility to firms consumers
Taxes themselves may not stop consumption significantly (e.g. if there is inelastic PED)

Evaluating the
use of regulation
to internalise
externalities
Evaluate, using
diagrams, the use
of policy
responses,
regulation, to the
problem of
negative
externalities of
production and
consumption.

Definition: These are laws that government uses to control (reduces) the production and
consumption of goods with negative externalities.
Examples:
Impose a law making discharging of chemical waste into waterways (rivers; sea) illegal
Impose a law making illegal to sell cigarettes to minors
Impose a law making firms that emit GHG plant a set number of trees to absorb CO2.
Advantages of regulations:
In order to comply with the law, firms will have to increase costs of production. This will
reduce their supply and increase the market price.
Government may gain some revenue from fines where the law is infringed upon.
Disadvantages of regulations:
Government will have to police these laws this will increase government expenditure
The laws may be politically unpopular so governments may be reluctant to
impose/enforce them

Tradeable
permits:
Issuing property
rights to
internalise
externalities
Evaluate, using
diagrams, the use
of policy
responses,
including market
based policies of
tradeable permits,
to the problem of
negative
externalities of
production and
consumption

Government may sell to firms the rights to e.g. pollute. The rights would set out the
quantity, type and time period of pollution. The owner of these rights can sell them, the
price being set by the forces of demand/supply for these rights.
These rights are purchased and give certain entitlements to the purchaser.
Tradeable rights are initially purchased from the governing authority and can then be sold by
the legal owner of the rights.
Examples:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

Advantages of using property rights to internalise a negative externality of production:

the owner has the incentive to limit their pollution to within these limits (else they face
government sanctions or will have to purchase more rights, incyurring higher costs).
the owner has the incentive to ensure that others who have not paid for these rights do not
pollute.
the owner can sell these rights, i.e. they are an asset.
Government gains revenue from the sale of property rights
Disadvantages of using property rights to internalise a negative externality of
production:
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
POSITIVE EXTERNALITIES OF PRODUCTION AND CONSUMPTION
i. Examples
ii. Diagrams
iii. Welfare loss
iv. Merit goods
v. Evaluate policy responses to the problem of negative externalities.
POSITIVE
EXTERNALITY
OF
PRODUCTION
Explain, using
examples and
diagrams, the
concepts of
positive
externalities of

Definition: This is a beneficial side effect to others/society that occurs due to production by a
firm.
These are also called Spillover benefits
- Social benefits
Examples:
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

production of a
good or service

_________________________________________________________________________
_________________________________________________________________________

The free market will not achieve allocative efficiency. In the free market less of these goods will
be produced at a higher price than is socially desirable. Resources will be under-allocated.
The Marginal Social Cost (MSC) curve is to the right of the Marginal Private Cost curve
(MPC).
The vertical distance between the MSC and the MPC is equal to the externality per unit
1. Positive Externality of Production

Private price =
Externality per unit=
Private quantity =
Loss in net welfare benefit =
Socially desirable price =
Socially desirable quantity =
Negative externality per unit =
= pareto quantity
This graph shows that with a positive externality of production the MSC at each unit of output
is less than the MPC. The MSC is to the right of the MPC. The socially desirable price Ps is
lower than the private price Pp. At the social equilibrium more is produced (Qp moves to Qs)
at a lower price.
POSITIVE
EXTERNALITY
OF
CONSUMPTION

Definition: This is a beneficial side effect to others/society that occurs due to consumption
by an individual.
These are also called Spill-over benefits
- Social benefits
Examples:
Explain, using
Increase in the quality of the future workforce due to education (e.g. better knowledge;
examples and
better thinking skills)
diagrams, the

Beneficial health effects and longer life expectancy of the workforce/population due to
concepts of positive
individuals healthy eating and physical exercise.
externalities of
consumption of a
Reduction in injury and death with road accidents through the wearing of seat belts
good or service
The free market will not achieve allocative efficiency. In the free market less of these goods
will be consumed at a higher price than is socially desirable.
The Marginal Social Benefit (MSB) curve is to the right of
the Marginal Private Benefit curve (MPB).
The vertical distance between the MSB and the MPB is equal to the
externality per unit
2 . Positive Externality of Consumption

10

Private price =
Private quantity =
Private market loss in welfare benefit =
Socially desirable price =
Socially desirable/pareto quantity =
Negative externality per unit =
This graph shows that with a positive externality of consumption the MSB at each unit of
output is more than the MPB. The MSB is to the right of the MPB. The socially desirable price
Ps is lower than the private price Pp. At the social equilibrium less is produced (Qp moves to
Qs) at a lower price.
MERIT GOOD

Explain that
merit goods are
goods whose
consumption
creates external
benefits

INTERNALISING

A POSITIVE
EXTERNALITY

SUBSIDY
Evaluate, using
diagrams, the
use of policy
responses,
including
subsidies, to the
problem of
positive
externalities of
production and
consumption.

Definition: This is good that society/ government considers beneficial for us to consume and
will encourage us to have this good. Merit goods usually have positive externalities of
consumption,
Examples:
Wearing seat belts

Children immunisation (e.g. polio; rubella; whooping cough; tuberculosis)

Physical exercise

education
Merit goods are likely to be UNDER-PROVIDED by the free market system, i.e. the socially
desirable optimum is not equal to the private market equilibrium. Therefore, merit goods are
an example of market failure.
Methods Government uses to increase production and encourage consumption of merit
goods:
_______________________________________________________________________

_______________________________________________________________________
_______________________________________________________________________

_______________________________________________________________________

Definition: This involves a government action to achieve the socially desirable equilibrium by
compensating those responsible for creating positive external benefits.
Government can do this through:
- subsidies
- regulation (laws)
- public provision
Definition: This is a payment by Government to firms to encourage production by contributing
towards the costs of production.
Note: subsidies may also be paid to individuals on low incomes to pay for their health care,
living expenses etc.
A subsidy can be used to internalize positive externalities of both production and consumption.
Once the externality is internalised the market equilibrium will reflect the social preferences,
i.e. the socially desirable price and quantity. Economic efficiency will be achieved.
1.Positive Externality of Production

SUBSIDY

11

Private price =
Private quantity =
Socially desirable price =
Socially desirable quantity =
Positive externality per unit =
Subsidy per unit =
Price received by producer =
Subsidy paid by government =
Gain in welfare benefit =
This graph shows that if a subsidy is provided the costs of production firms must meet
decrease. The supply curve (MPC) shifts to the right (MPC + subsidy = MSC). More is
supplied at each price level. The price consumers pay falls (Pp to Ps); the quantity
sold/produced increases (Qp to Qs). The price producers receive increases ( to Ps +
subsidy per unit).The positive externality is brought into the market (i.e. internalised).
2. Positive Externality of Consumption

Private price =
Private quantity =
Socially desirable price =
Socially desirable quantity =
Positive externality per unit =
Subsidy per unit =
Price received by producer =
Subsidy paid by government =
Gain in welfare benefit =
This graph shows that if a subsidy is provided the costs of production firms must meet
decrease. The supply curve (MPC) shifts to the right (MPC + subsidy). More is supplied at
each price level. The price consumers pay falls (Pp to Ps); the quantity sold/produced
increases (Qp to Qs). The price producers receive increases ( Pp to (Ps + subsidy per
unit)).The positive externality is brought into the market (i.e. internalised).
TARGETED
SUBSIDIES
EVALUATING
THE USE OF A
SUBSIDY TO
INTERNALISE
AN
EXTERNALITY

GOVERNMENT
DIRECT
PROVISION OF
GOODS TO
INTERNALISE

This is a subsidy paid to individuals who are disadvantaged in some way e.g. those on lower
incomes may receive a community service cards [discount card] for health services.
Advantages:
Consumers buy more at a lower price: the market moves towards the allocative efficiency
The externality is reflected in the lower market price and higher quantity.
Net welfare benefit to society increases.
Disadvantages:
Increased costs to government (some governments may not be able to afford subsidies)
Difficulty is assessing exactly the extent of the externality and matching it with an
equivalent subsidy per unit: the subsidy may be either under or over paid.
Subsidies may be subject to political changes and political corruption.
If price is charged:
Price =
Quantity =
Dead weight loss =
Examples:

12

AN
EXTERNALITY

Evaluate, using
diagrams, the use
of policy
responses,
including direct
provision of
goods, to the
problem of
positive
externalities of
production and
consumption.
REGULATION
Evaluate, using
diagrams, the
use of policy
responses,
including
legislation, to
the problem of
positive
externalities of
production and
consumption

PUBLICITY
PROGRAMME
/
PROMOTION
Evaluate, using
diagrams, the
use of policy
responses,
including
advertising to
influence
behaviour, to the
problem of
positive
externalities of
production and
consumption.

- Healthcare
- education
Advantages:
more will be consumed at no, or a very low, price
low income groups have access to these goods: their consumption is independent of income.
Inequality reduces.
Disadvantages:
Increased costs to government: not all governments will be able to provide the good/service
to the extent that the positive externality requires
If it is not compulsory, e.g. child immunisation, not everyone will consume the good/service
________________________________________________________________________

Examples:
- Wearing of cycle helmets on motorbikes and bicycles
- Fitting and wearing of seatbelts in cars
- Attending school between the ages of 6 and 16
Advantages:
More people are likely to consume the good with a positive externality (consumption
increases)
Disadvantages:
For some goods, the law will only be successful if the government also provides them free
of charge (e.g. education)
Government will need to police the law in order for it to be effective
The law may not be politically popular, e.g. some people may see the law as infringing on
the individual freedom/personal choice (e.g. wearing of cycle helmets)
Government can encourage the consumption of Merit goods (discourage the consumption of
demerit goods) through publicity programmes, e.g. television advertisements; posters; free
booklets etc.
Examples:
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
Advantages:
Raises awareness encourages consumption of goods with positive externalities of
consumption (discourages consumption of goods with negative externalities of
consumption).
Maybe less costly to government than a subsidy
________________________________________________________________________
Disadvantages:
Prices of goods may not change (e.g. prices of goods with positive externalities may not
decrease socially desirable price may not be achieved)
Publicity campaigns/ education are costly government expenditure increases.
Change in consumer behaviour may be less than e.g. regulation, i.e. campaign is less
effective.
With negative externalities, there is no gain in government revenue as there is for an indirect
tax

13

Externality summary:
SOCIAL COST (MSC)
= PRIVATE COSTS (MPC) plus
Positive externalities of PRODUCTION MSC < MPC for each unit of output
- Negative externalities of PRODUCTION MSC > MPC for each unit of output

MSC

MPC

EXTERNALITIES

SOCIAL BENEFIT
(MSB) = PRIVATE BENEFITS (MPB) plus
- Positive externalities of CONSUMPTION MSB > MPB for each unit of output
- Negative externalities of CONSUMPTION MSB < MPB for each unit of output
MSB

MPB

EXTERNALITIES

MARKET FAILURE: LACK OF PUBLIC GOODS

- DISTINGUISH BETWEEN PUBLIC GOODS AND PRIVATE GOODS
IDENTIFY EXAMPLES OF PUBLIC GOODS
EXPLAIN WHY LACK OF PUBLIC GOODS REPRESENTS MARKET FAILURE (WHY
PUBLIC GOODS ARE NOT NORMALLY PROVIDED BY THE MARKET).
DISCUSS THE IMPLICATIONS OF COLLECTIVE (DIRECT GOVERNMENT) PROVISION
OF PUBLIC GOODS.
PRIVATE
GOOD

Definition: A private good is rival, depletable and excludable by price. Property rights are clear and
there are no externalities.
Rival means that if someone has the good it is NOT available for anyone else to have.
Depletable means that in order for someone else to have the good, more scarce resources must be
used.
Excludable by price means that the good is available only to those who pay the price.

14

Examples:
_________________________________________________________________________

_________________________________________________________________________
_________________________________________________________________________

_________________________________________________________________________
Equilibrium is determined by PRIVATE PREFERENCE, i.e. by what consumers demand and
producers supply.
Private equilibrium is allocatively efficient for private goods, i.e. goods that have NO externalities.
For a PRIVATE GOOD the socially desirable equilibrium is the private equilibrium, i.e. MPB =
MSB, as there are no externalities.
MPC = MSC
PUBLIC
GOOD
Using the
concepts of
rivalry and
excludability
, and
providing
examples,
distinguish
between
public goods
and private
goods
Free rider
behaviour
Explain with
reference to
the free-rider
problem,
how the lack
of public
goods
indicates
market
failure

Definition:
NON-RIVAL - if one person is using or has a public good, the goods is also available to others,
e.g. traffic lights.
NON-DEPLETABLE - no more resources are required to allow others to have use of the good,
e.g. surf life-savers, army (national defence)
NON-EXCLUDABLE BY PRICE
i.e. public goods have no price signals. We cannot
charge a fee for the use of a public good. Once in existence a public good can benefit anyone who
wants to use it; they cannot be stopped from using it if they have not paid, e.g. street lights. This
results in FREE-RIDER BEHAVIOUR.
Examples:
________________________________________________________________________
_________________________________________________________________________

_________________________________________________________________________
_________________________________________________________________________

Definition: Free rider behaviour is the refusal to contribute directly to the cost of providing a
public good on the grounds that once it is provided no one can be excluded from using the good.
Public goods are NON-EXCLUDABLE BY PRICE: people can enjoy the use of the good without the
provider being able to charge them for the use of the good, i.e. users have a free ride. Consumers
will think that if they wait for others to pay for the provision of the good they will enjoy the benefits
of that good free of charge.
There are NO PRICE SIGNALS for public goods: it is impossible to collect payment from users of
public goods, thus private producers (profit-orientated firms) will not want to supply public goods,
i.e. if they have to incur costs to provide the good, but receive no revenue, there is negative profit.
No private producer will provide a price-free service.
This represents market failure as the private market fails to produce the public goods society desires.
Provision of public goods is left to government.

15

Government
provision of
public goods
Discuss the
MU
implication
of the direct
provision of
public
goods by
government

With a public goods, marginal cost pricing cannot be used:

For the individual consumer the marginal cost is zero, because they dont have to pay (recall:
individual consumer demand MU- and supply MC= market price - curves).
Producers marginal cost for a public good is zero as it is non-depletable: no further resources are
required to enable another person to have the good
An Individual Consumers Demand
Price $

MU = Demand

Quantity
MARKET
MC
/
MB
$

MB

MSB

Because price signals are absent it is difficult to know how much of a public good to provide.
Therefore public goods are allocated through POLITICAL DECISIONS (central or local
government).
Government provides these goods and charges COLLECTIVELY through the tax/rate system.
The quantity of a public good produced is determined by politicians (in a democracy, elected by
voters).
The SOCIALLY OPTIMAL OUTPUT of a public good occurs where
MSB = MSC
Implications:
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________

16

TYPE OF GOOD

PROVISION

EXTERNALITIES

CHARACTERISTICS

PRIVATE GOOD

Free market (forces of

demand/supply);
consumer sovereignty;
MPB = MPC

No externalities

Property rights are clear;

excludable by price;
depletable;
;rival

MIXED GOOD

Government
intervention in market
through regulation;
provision; taxes;
subsidies.
MSB = MSC

Has externalities:
spillover costs and
spillover benefits

Externalities

PUBLIC GOOD

Direct provision by
government.

Usually has externalities

(positive).

Non-excludable by
price;
non-rival;
non-depletable;
leads to free-rider
behaviour.

COLLECTIVE GOOD

Goods provided by
government free of
direct (user-pays)
charge;
paid for out of
taxes/rates.

Usually have
externalities (positive).

Usually have
externalities (positive).

MERIT GOOD

Government may
intervene in the free
market by:
regulation;
subsidy;
direct provision.

Usually has positive

externalities of
consumption.

Good deemed to be
good/beneficial for us by
government/society; it is
considered that we
should have it.

DEMERIT GOOD

Government may
intervene in the free
market by:
regulation;
tax;
banning.

Usually has negative

externalities of
consumption.

Good deemed to be
harmful for us by
government/society; it is
considered that we
should not have it.

COMMON ACCESS RESOURCES AND THE THREAT TO SUSTAINABILITY:

17

http://www.youtube.com/watch?v=R8-2gI9fFSE ocean
http://www.youtube.com/watch?v=rm8TyJ2fOaw forest
http://www.youtube.com/watch?v=FKI5Krq4r1Q Mekong
http://www.youtube.com/watch?v=Y1M4nFmwQGY
Cambodia
http://www.youtube.com/watch?v=rUlUddqKyiM drones
http://www.youtube.com/watch?v=i5mMI8t7vV0
Tuna fishing hand lines
http://www.theatlantic.com/video/index/265633/inside-japans-quest-to-make-bluefin-tuna-more-sustainable/
tuna farming
http://www.youtube.com/watch?v=21fwYooOgnw
decimated Bluefin tuna.
http://www.theguardian.com/environment/2013/jan/31/carbon-tax-cap-and-trade Carbon tax v capand-trade: which is better?

COMMON
ACCESS
RESOURCES

Definition: These are resources that are difficult and expensive to exclude people from
using due to property rights (i.e. ownership) being unclear/indeterminate. This leads to an
absence of price signals for these resources.
Other names: common-pool resources; common property resources.

Explain, using
examples common
access resources.

Examples: common access resources are often natural resources e.g.

- fish stocks
- rivers and waterways
- minerals under the sea floor (submarine)
- tropical rain forest
- over-exploitation/farming of land
They may also be human-made systems for managing natural resources, e.g. irrigation
systems; hydroelectric power generation.

Describe
sustainability and
apply the concept of
sustainability to the
problem of common
access resources.

Explain the
consequences of the
lack of a pricing
mechanism for
common access

Definition: Sustainability means that scarce resources are being managed and used at a
rate such that there will be sufficient available resources to enable economic growth for
future generations.
Over-use of these resources results involves harvesting these resources at an
unsustainable rate, i.e. at a rate greater than the rate of regeneration of the resource.
Resources cannot naturally regenerate to replace stocks used and ensure stocks for future
economic growth. The resource becomes depleted, e.g. the results of drift net fishing.
Over-use of the resource also leads to degradation of the resources, e.g. soil becomes
eroded and/or loses nutrients through overuse and deforestation.
Examples:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
These are negative externalities of production and hence market failure occurs: too much

18

resources in terms
of these goods being
overused/depleted/d
egraded as a result
of activities of
producers and
consumers who do
not pay for the
resources they use,
and that this poses
a threat to
sustainability.

of the resource is used at too lower price than is socially desirable.

As ownership of these resources is common, e.g. in international waters, there are no
property rights relating to these resources, and there is no price mechanism operating.
Consumers and produces do not pay for the resources they use. The lack of price for
common access resources means that they are more likely to be over-consumed leading
to depletion of stocks and endangering species, as well as degrading of resources i.e. nonsustainable resources use.
These externalities are not internalised, i.e. the market equilibrium does not reflect the
costs to society incurred by the use of some of our natural resources in production.
The MSC MPC
MSC > MPC

MSB MPB
MSB < MPB

International waters over-fishing and killing of marine life e.g. driftnet fishing
Deforestation (tropical rainforest) loss of bio-diversity; climate change; soil depletion;
erosion

SUSTAINABILITY
and the BURNING
OF FOSSIL FUELS
Discuss, using
negative externality
diagrams, the view
that economic
activity requiring the
use of fossil fuels to
satisfy demand poses
a threat to
sustainability

SUSTAINABILITY
and POVERTY in
ECONOMICALLY
LESS
DEVELOPED
COUNTRIES
Discuss the view that
the existence of
poverty in

Negative externality of Production from the burning of fossil fuels:

The above graph shows that _________________________________________________

__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________

POVERTY IN LESS DEVELOPED COUNTRIES and LAND OVERUSE:

Economically less developed countries (ELDC) have a high degree of subsistence
agriculture. In some of these countries land is cleared/trees felled for fuel (firewood) and
farming. These trees are often not replanted and once one area has been deforested the
population moves to another. Negative externalities arise from this lifestyle from:
1. Soil erosion and leaching of soil nutrients: trees/plant matter hold the soil, soil
moisture and replace nutrients in the soil. Once trees are gone there is greater
surface and sub-surface water run-off leading to loss of fertile top layer of soil;
leaching of soil nutrients into water ways; flooding; clogging of waterways with
soil destroying river fish and plant life.
2. Creation of deserts unfertile, dry land

19

economically less
developed countries
creates negative
externalities through
over-exploitation of
land for agriculture,
and that this poses a
threat to
sustainability
SUSTAINABILITY
Evaluate, using
diagrams. Possible
government
responses to threats
to sustainability,
including legislation,
carbon taxes, cap
and trade systems,
and funding for
clean technologies.

Definition: Sustainable resource use means that scarce resources are being managed and
used at a rate such that there will be sufficient available resources to enable economic
growth for future generations.
Current economic growth must not be made at the expense of economic growth in the future.
An economy/the world should not consume at a rate now that will mean that future
generations will be worse, rather than better, off.
This is a global problem for resources such, e.g.
- global decrease in fish stocks; increased endangered species
- global deforestation leading to increased flooding and soil erosion as well as
climate change
- global warming from greenhouse gas emissions
- loss of biodiversity
- loss of nutrients in soil
- global increase in desert area
- Ozone layer depletion (fluro-carbon emissions)
...and many more. They arise from overuse of resources that are not owned by anyone e.g.
air, oceans, wildlife. These are called common property resources.
Short-term concerns:
e.g. air pollution
Long term concerns: Sustainable development
Being able to meet the needs of the present without compromising the ability o future
generations to meet their own needs. Using resources now such that there will sufficient
resources for future generations.
Long term concerns include:
changing climate patterns impacting on agriculture and available land
depletion of natural resources.
Finding alternative, sustainable sources of energy
GOVERNMENT METHODS FOR ACHIEVING SUSTAINABLE GROWTH:
USING REGULATIONS/LAWS TO REDUCE POLLUTION.
Examples:
SETTING QUOTAS ON THE HARVESTING OF NATURAL RESOURCES such as
fish (or rain forest) so that stocks have time to naturally regenerate to replace stocks used
up, and increase in number.
Government sets a quota
Examples:
equal to the socially
desirable quantity Qs. At
MC/MB
the private price Pp there
MSC
is now a shortage (Qp
MPC
Q1). The price is bidded
Ps
up: the shortage
disappears at the socially
desirable price Ps. Less is
20
produced at a higher
price. Net welfare benefit
loss disappears.

Pp
MPB=MSB
Q1 Quota Qp
Qs

Quantity

USING REGULATIONS/LAWS TO CONTROL LAND USE AND

DEVELOPMENT, e.g. so that natural heritage is retained.
Examples:

TRADEABLE EMISSIONS SCHEMES, CAPPING THE EMISSION e.g. of

greenhouse gases.
Examlpes: The Kyoto agreement
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
CARBON TAXES:
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
______________________________________________
PROMOTING THE DEVELOPMENT AND IMPLEMENTATION OF CLEAN
TECHNOLOGIES:

Explain, using
examples, that

INTERNATIONAL COOPERATION AMOUNG GOVERNMENTS:

e.g. to ban drift-net fishing; reduce greenhouse gas emissions.

21

government
responses to threats
to sustainability are
limited by the global
nature of the
problem and lack of
ownership of
common access
resources, and that
effective responses
require international
co-operation

__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
GLOBAL RESPONSES TO GLOBAL PROBLEMS:
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________

EXTRACT FROM NEW ZEALAND GOVERNMENT MINISTERIAL REPORT ON TRADEABLE

EMMISSION SCHEME
1. What is the emissions trading scheme?
Emissions trading is a market-based approach for achieving environmental objectives where emission units are
traded between participants. In effect, those emitting greenhouse gases have to pay for increases in emissions
and are rewarded for decreases. This encourages emissions reductions.
The emissions trading scheme operates within the cap on emissions established by the Kyoto Protocol during its first
commitment period (20082012). There is no cap on the emissions that occur within New Zealand. However,
domestic emissions that exceed New Zealands allocation under the Kyoto Protocol must be matched by emission
units bought internationally from within the Kyoto cap on emissions.
(Country As) scheme covers emissions of the following six greenhouse gases: carbon dioxide (CO2), methane
(CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF6).
These are the greenhouse gases covered by the Kyoto Protocol.
The emissions trading scheme is part of the governments response to climate change. Emissions trading will help
reduce emissions, encourage and support global action on climate change, and help put (Country A) on a path to
sustainability. This factsheet explains how the (countrys) emissions trading scheme works.
What sectors does the emissions trading scheme cover?
The emissions trading scheme covers the following sectors of the economy: forestry, liquid fossil fuels
(transport), stationary energy, industrial processes, synthetic gases, agriculture and waste.
People carrying out some specified activities are required to participate in the scheme. People carrying
out other specified activities can choose to participate.
How does emissions trading work?
- Firms buy or are allocated emission units.
- Firms emit green house gases and are required to match their emissions by surrendering an equivalent
number of emission units. Surrendering a unit means it is incapable of being used again, for example, it
cannot be transferred to another participant.
- Some firms, such as those with forests planted after 1989, are able to earn emission units for carbon dioxide
stored or removed from the atmosphere.
- Firms who do not have to participate can buy units and sell them to other firms who need them.
The emissions trading scheme can be explained by using a simple example:

22

Firm A is an oil company. It needs to buy emission units to cover the greenhouse gas emissions it is
responsible for.
Firm B is a large forestry company that receives emission units for land it is planting in forests. It is also
undertaking some deforestation, leading to emissions for which it has to surrender emission units. Initially,
Firm B has a shortfall of units but, as the new forest matures over time, it will have an overall surplus of
units.
Firm C is a major industrial user of electricity. Its costs increase with the introduction of the emissions
trading scheme. To help Firm C adapt to these higher costs, the government gives Firm C an allocation of
emission units, which Firm C can sell to offset its increased electricity costs.
Under the emissions trading scheme, Firm A and Firm B both buy Firm Cs units in the short term to cover their
emissions. Because it now has to pay higher energy prices, Firm C finds it is cheaper to invest in energy efficiency.
Alternatively, any firm can import or export eligible units from other countries.
Over time, as its forest matures, Firm B has spare units available and sells them to Firm A.

What do participants have to do?

Participants are required to:
1. monitor, record and report activities that lead to greenhouse gas emissions, some of which will be
the indirect result of their activities
2. surrender emission units (either Kyoto units or New Zealand-specific units called New Zealand Units or
NZUs) equal to the amount of emissions associated with their activities in each compliance period.
Secondary market traders, such as brokers, can hold and trade NZUs, but do not have reporting obligations and are
not required to surrender emission units. They can hold and trade emission units to take advantage of market
opportunities.
How are emission units acquired?
Participants may acquire emission units by receiving a free allocation from the government. In addition, participants
and secondary market traders can acquire emission units from the following sources:
buying them from the government (although the government has no surplus units to auction at present)
buying them from approved overseas sources
buying them from another participant or secondary market trader, either by entering into a direct bilateral
contract with the other party, or trading through a broker or trading exchange.
2.
EVALUATION OF AM EMTS:
Price-based options: emissions tax or emissions trading?
The two options for a price-based measure are:
an emissions tax levied on all economic activity that involves emissions
the trading of a limited number of emission units, whose price would be determined by supply and demand.
The government has decided against proceeding with an emissions tax because it is a blunt instrument that would
require regular alteration to ensure its effectiveness and to keep it in line with international emissions prices. An
emissions trading regime would be preferable because:
provides the government with relative certainty about the volume of emissions, and hence the
environmental objectives, whereas a tax simply imposes a price on each unit of emissions and does not
limit emissions per se
is easily linked into the international emissions price and global emission reduction efforts, which
minimises the risk to the New Zealand taxpayer of overshooting or undershooting our Kyoto Protocol and
future international commitments

23

provides New Zealand firms with maximum flexibility through enabling them to reduce or offset their
emissions (including managing credits and liabilities over time) by accessing emission reduction
opportunities at the lowest cost
has wide support, being preferred as the primary means of managing New Zealands emissions in the long
term by many submitters on the five discussion documents released in December 2006
allows New Zealand to devolve forest credits and liabilities to landowners as part of a broader economic
instrument
is emerging as the favoured measure among developed countries, and early adoption by New Zealand
would bring significant benefits.

3. Impacts of (an) ETS

The desired impact of the NZ ETS will be to change investment and consumption behaviours by integrating a price
for emissions into decision-making by producers and consumers. The result will be a progressive shift in our
economy and lifestyle towards consuming, using and investing in goods and services with lower greenhouse gas
emissions.
Introducing an emissions price will increase the cost of transport fuels and other non-renewable energy (such as coal
and natural gas), and will cause relative price increases in other sectors that involve emissions, such as industrial
processing and agriculture. Conversely, it will reduce the relative price of low-emission goods and services and
increase the relative returns on investment in low-emissions technologies (eg, making it more cost-effective for
electricity generators to invest in renewable energy such as wind and solar power). It will also increase the
profitability and cash flow for afforestation activities through the devolution of credits (with associated liabilities)
for forest sinks to landowners.
4. WHY IS AN EMTS NECESSARY?
Climate change is an unprecedented challenge for the global community, for the world environment, for the world
economy, and therefore for (Country A) as well. Without global action to reduce and stabilise greenhouse gas
emissions, the world is projected to experience a rise in temperature, increasing sea levels, more frequent extreme
weather events and a change in rainfall patterns.
...Climatic changes may have a severe impact on our native ecosystems, industries, infrastructure, health, biosecurity
and economy. If greenhouse gas emissions are not reduced significantly over the coming decades, the damage to
our environment and quality of life could be significant and irreparable.
...we need to recognise the shift in attitudes in our key overseas markets, where climate change issues are having a
growing impact on the thinking of governments and consumers.
...There will be significant new economic opportunities for these sectors if they can position themselves at the
forefront of the development of new carbon-friendly technologies.
Many of the things we do in the name of climate change achieve other commonsense objectives. Warm, energyefficient homes are healthy homes. Fuel and energy efficiency saves money. Forestry reduces erosion and improves
water quality. Becoming a leader in new sustainable technologies and smarter ways of doing things gives us the
chance to transform the economy and improve our quality of life, as well as protect the environment.
Executive Summary
Climate change is a major problem for (Country A) and the world
The Earths climate is changing at an increasingly rapid rate, largely due to ongoing high rates of greenhouse gas
emissions caused by human activity. Even with concerted global effort to reduce greenhouse gas emissions there are
likely to be changes in temperature and rainfall patterns, increases in the number of significant wind and storm
events, and an increased risk of flooding and coastal erosion. These impacts have flow-on effects for air and water
quality, the retention of nutrients in soils, and preserving biodiversity.
... most countries could suffer severe adverse effects to our economy, our infrastructure and our way of life.
Climate change, sustainability and economic transformation

24

Reducing greenhouse gas emissions is therefore imperative, for both environmental and economic reasons.
...Indeed, economic transformation and environmental sustainability can be seen as two sides of the same coin. For
example:
improved efficiency in the use of energy and natural resources is central to improving productivity and
increasing the value of our exports, and will help to conserve valuable non-renewable resources for use by
future generations
developing renewable domestic energy sources will improve (a countrys) energy security
there is a growing market for products and services which involve low greenhouse gas emissions, as has
already been recognised by sectors such as tourism, agriculture and viticulture
the move towards a knowledge economy involves shifting the production balance towards value-added
activities that draw upon information technology, the creation of intellectual property, and the development of
new technologies in areas such as biotechnology, all of which tend to be less emissions intensive
conversely, failure to control greenhouse gas emissions could have trade risks, both at a political level (because
countries that do not take the issue seriously may find it hard to improve access to markets and may face trade
barriers) and at a global consumer level
the impetus towards sustainability creates new incentives to develop efficient technologies and improve
management practices across all sectors of the economy.
In fact, many of the things we do in the name of climate change achieve other commonsense objectives. Warm,
energy-efficient homes are healthy homes, and are known to reduce the incidence of chronic conditions such as
asthma. Energy efficiency frees up resources for households and improves business profitability. Planting or
maintaining forests reduces erosion and improves water quality.
Countries that are proactive in responding to the challenge of reducing emissions will position themselves to achieve
a smoother transition to emission constraints and are more likely to benefit from the new market opportunities that
will emerge.
(Country As) challenge
There are four main climate change challenges for(Country A). We need to:
control our own greenhouse gas emissions and reduce them relative to the current growth trend
support international initiatives for multilateral action on greenhouse gas emissions, principally through
maintaining momentum on the implementation of the Kyoto Protocol and ensuring this momentum is
carried through into whatever agreements emerge for the period after 2012
prepare for, and adapt to, the impacts of changes in our physical environment, by responding to the risks
and taking advantage of the opportunities they present
realise the above objectives at the lowest achievable long-term cost.
..... has already introduced a range of measures to reduce emissions. These include:
financial incentives (such as the Permanent Forest Sink Initiative and incentives to promote solar hot water
heating and better home insulation)
improved standards and codes (such as energy efficiency standards for new homes and household products)
direct regulation of major emission sources (such as the biofuels sales obligation)
public education (such as Energy Star efficiency labelling and Fuelsaver information on vehicle fuel
efficiency)
joint investment in research for mitigation of agricultural greenhouse gases.
Although significant, these measures are not sufficient to achieve the long-term emission reductions that will be
integral to (a countrys) sustainable development pathway, particularly given that by 2020 our gross emissions
(excluding the land use, land-use change and forestry sector) are estimated to be roughly 48 per cent above our 1990
levels
(Country As) emissions are the product of a broad range of economic activities, and we need a correspondingly
broad-based economic measure, based on prices, to bring about the behavioural changes needed to implement our

25

greenhouse gas reduction strategy.

A price-based measure has a number of significant advantages in this respect.
It can provide a strong incentive (depending on the price it uses) for those making decisions about emissions to
reduce them to a level that reflects the total cost to society, including the environmental cost.
It harnesses the market dynamic by providing automatic incentives for firms to invest in reducing
emissions and to shift to lower-emissions products and services.
It provides flexibility for firms and fosters innovation and the seeking out of least-cost emission reduction
strategies.
It can be linked into international efforts to reduce emissions.

26