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.

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.

International market selection: Developing a model from Australian case studies

This paper develops a theory that firms seek out new country markets on the basis of expected commercial returns. These expectations depend on judgements about the attractiveness of the market and the firm's competitive position in it, which in turn are influenced by informants. It is the number and strengths of these informants that will underlie the probability of a country being identified and assessed as a new market by any firm.

A survey of Australian consumers' attitudes towards UHT milk

A telephone survey was conducted in Melbourne and Brisbane to obtain a profile of milk consumption in Australia and determine consumers' attitudes regarding UHT milk. It was anticipated that this survey would reveal the reasons for the low level of UHT milk consumption in Australia. Pasteurised milk was the main milk type used by more than 80% of respondents. For UHT milk this figure was much lower (approximately 10%), even though two thirds of respondents had tried UHT milk. Factors that were found to influence UHT milk consumption included existing milk consumption habits, consumer perception, flavour and price. The majority of non-users of UHT milk stated habit of using other milk type as their main reason for not using UHT milk. Other reasons included poor nutritional value, poor flavour and not real/pure milk, indicating a negative consumer perception of the product. The flavour of UHT milk was identified as a problem, with nearly half of UHT milk users considering it to be worse than the flavour of pasteurised milk. However, a small proportion of UHT milk users preferred the flavour of UHT milk, with the majority of them stating that it was creamier, richer and/or stronger than the flavour of pasteurised milk. Prior to post-farmgate deregulation, price was shown to discourage consumers from using UHT milk. At the time of the survey, post-farmgate prices in Victoria were deregulated resulting in UHT milk being priced below that of pasteurised milk in some instances. This was believed to contribute to a significantly higher market share of the product in Melbourne than in Brisbane.