Notes on market failure and the Paretian (Kaldor-Hicks) relevance and irrelevance of unfavourable externalities

The following are notes that have been distributed by me over the last few years to students in Environmental Economics at The University of Queensland. They give particular attention to whether externalities are Pareto or Kaldor-Hicks relevant from a policy point of view. Externalities are Kaldor-Hicks or Pareto irrelevant if no change is possible for which gainers could compensate losers. Both absolute and marginal externalities may be Kaldor-Hicks relevant. Infra-marginal negative externalities are often, but not always, Kaldor-Hicks irrelevant. There are at least two cases where such externalities can be relevant. First, the absolute impact of the negative externality may be so great that the source of the externality should be eliminated. Secondly, if the externality arises from production, its nature may depend on the type of production technique adopted. Although for the technique adopted, an infra-marginal negative externality occurs. That is Paretian irrelevant given that choice of this technique is the only available possibility, alternative techniques may actually be available in practice. Some of these may generate even smaller total external effects and be socially preferable. Both cases are outlined and illustrated in these notes. The analysis reveals the dangers of relying on marginalism for deciding on environmental policy. Total (external) effects are often of great social and economic importance and appropriate social choices cannot be made on the basis of marginalism alone.

Poverty - dynamic and sustainability perspectives: Implications for welfare and policy with reference to India

After outlining some comparative features of poverty in India, this article reviews critically recent literature on the dynamics of poverty. On economic efficiency grounds, it rejects the view that the chronically poor are more deserving than the non-chronic poor of poverty assistance. Mechanisms of households and communities for coping with poverty are discussed. The possibility is raised that where poverty has been persistent that rational methods for coping with it are likely to be well established, and less suffering may occur than for households and communities thrown temporarily into poverty. However, situations can also be envisaged where such rational behaviours deepen the poverty trap and create unfavourable externalities for poverty alleviation. Conflict can arise between programmes to alleviate poverty in poor communities and the sustainability of these communities and their local cultures. Problems posed by this are discussed. Furthermore, the impact of market extension on poor landholders is considered. In contrast to the prevailing view that increased market extension and liberalisation is favourable to poor farmers, it is argued that inescapable market transaction cost makes it difficult for the poor to survive as landholders in a fluid and changing market system. The likelihood of poor landholders joining the landless poor rises, and if they migrate from the countryside to the city they face further adjustment hurdles. Consequently, poor landholders may be poorer after the extension of the market system and only their offspring may reap benefits from market reforms.

Testing for Market Power in Multiple-Input, Multiple-Output Industries: The Australian Grains and Oilseeds Industries

Recent empirical studies have found significant evidence of departures from competition in the input side of the Australian bread, breakfast cereal and margarine end-product markets. For example, Griffith (2000) found that firms in some parts of the processing and marketing sector exerted market power when purchasing grains and oilseeds from farmers. As noted at the time, this result accorded well with the views of previous regulatory authorities (p.358). In the mid-1990s, the Prices Surveillence Authority (PSA 1994) determined that the markets for products contained in the Breakfast Cereals and Cooking Oils and Fats indexes were "not effectively competitive" (p.14). The PSA consequently maintained price surveillence on the major firms in this product group. The Griffith result is also consistent with the large number of legal judgements against firms in this sector over the past decade for price fixing or other types of non-competitive behaviour. For example, bread manufacturer George Weston was fined twice during 2000 for non-competitive conduct and the ACCC has also recently pursued and won cases against retailer Safeway in grains and oilseeds product lines.