A Level Economics 53: Demerit Goods

Market Failure of Demerit Goods:

Demerit goods are goods and services that are considered to have negative effects on individuals and society. Their consumption can lead to detrimental outcomes, such as health issues, social problems, or environmental degradation. Demerit goods tend to be overprovided and overconsumed in the free market due to several factors, leading to market failure. The market failure of demerit goods can be attributed to externalities and imperfect information.

Externalities: Externalities are unintended spillover effects of a transaction that affect third parties who are not directly involved in the exchange. In the case of demerit goods, negative externalities are often associated with their consumption. When individuals consume demerit goods, such as tobacco, alcohol, or fossil fuels, it can lead to adverse effects on others and society as a whole. For example:

• Tobacco Consumption: Smoking tobacco not only harms the health of the smoker but also exposes non-smokers to secondhand smoke, causing respiratory issues and increasing healthcare costs.

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• Fossil Fuel Consumption: The burning of fossil fuels for energy contributes to air pollution and greenhouse gas emissions, leading to climate change and environmental degradation that affect the global population.

These negative externalities lead to an overallocation of resources by the free market because private consumers do not consider the broader costs imposed on society when making consumption decisions. As a result, the quantity of demerit goods consumed in a free market is higher than what is socially optimal, leading to market failure.

Imperfect Information: Another reason for the market failure of demerit goods is imperfect information. Consumers may not fully understand the potential harm and negative consequences associated with the consumption of demerit goods. In some cases, producers may actively mislead consumers or downplay the risks, leading to uninformed choices. For example:

• Alcohol Advertising: Misleading or glamorous advertising of alcoholic beverages may hide the potential health risks and negative social impacts, leading to increased consumption among vulnerable populations.

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• Fast Food Industry: Consumers may not be fully aware of the long-term health consequences of consuming fast food high in saturated fats, sugar, and salt.

Due to imperfect information, consumers may undervalue the costs and negative externalities of demerit goods, leading to higher demand and consumption in the market. As a result, the free market may allocate too many resources to produce and provide these goods, causing market failure.

Government Intervention and Policy Implications: To address the market failure of demerit goods and negative externalities, governments often intervene through various policy measures, such as:

1. Taxes and Regulation: Governments may impose taxes, such as excise taxes on tobacco and alcohol, to internalize the negative externalities associated with their consumption. Higher taxes increase the cost of demerit goods, reducing demand and consumption.

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3. Public Awareness Campaigns: Governments can invest in public awareness campaigns to educate consumers about the risks and negative consequences of consuming demerit goods. This helps to counteract the effects of imperfect information.

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5. Health and Safety Regulations: Governments can implement health and safety regulations on products and industries that produce demerit goods. For example, regulations on the advertising and packaging of tobacco products can discourage consumption.

By addressing the market failure of demerit goods and negative externalities, governments aim to reduce the harmful impacts on individuals and society and promote more socially responsible consumption behavior. This leads to improved overall welfare and societal well-being, creating a more efficient allocation of resources and maximizing the positive impact on both consumers and society as a whole.

Sugar: it's time to get real and regulate

The consumption of fructose and sucrose is on the increase – and so are preventable diseases such as Type 2 diabetes

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• • Jacqueline Windh
  • guardian.co.uk, Monday 13 February 2012

Last week, a trio of American scientists led by Robert Lustig, professor of clinical paediatrics at the University of California, published an article in the journal Nature, outlining the toxic effects that sugar has on humans and arguing for governmental controls on its sale and distribution. While the authors come short of labelling sugar a "poison" outright, in a 2007 interview with ABC Radio about excess sugar consumption, Lustig said: "We're being poisoned to death. That's a very strong statement, but I think we can back it up with very clear scientific evidence."

That evidence has been growing – particularly in the western world, where consumption of sugar is increasing rapidly. Globally, sugar consumption has tripled in the past 50 years. But, it turns out, the greatest threat to human health is one type of sugar in particular: fructose.

In the US, per-capita consumption of fructose, a common food additive there – mainly in the form of high-fructose corn syrup – has increased more than 100-fold since 1970. Although fructose is not a common added sweetener in the UK and other countries, sucrose is; sucrose contains 50% fructose. Lustig and his co-authors note that last year, the United Nations announced that non-communicable diseases (NCDs) had, for the first time, overtaken infectious diseases in terms of the global health burden. Non-communicable diseases now account for 63% of all deaths, and that total is expected to increase by a further 17% over the next decade.

The scientists cite growing evidence that our increasing consumption of sugar is partly responsible for the growth of NCDs: diseases such as cardiovascular disease, cancer, diabetes and the suite of symptoms known as metabolic syndrome. And they argue that, as for substances known to cause NCDs such as tobacco and alcohol, sales and distribution of sugar should be controlled, and products with added sugar should be taxed.

I used to be a sugar addict. And yes, for those who haven't found out first-hand, sugar is addictive; perhaps not to the same degree as alcohol and tobacco, but a recent study has shown that sugary foods, or even just the expectation of eating sweets, can trick the brain into wanting more. When I decided to cut my sugar consumption 12 or so years ago, I had no idea of the serious health concerns that excess sugar consumption brings. I only wanted to avoid the so-called "empty calories" that sugar provides. I had noticed that eating cookies and desserts was making me feel lethargic.
Sugar, and in particular fructose, affects metabolism. Unlike glucose, fructose can only be metabolised in the liver. Some of its effects on the human body include increasing levels of uric acid, which raise blood pressure; increased fat deposition in the liver; and interference with the insulin receptor in the liver. This inhibits ability of the brain to detect the hormone leptin, which regulates appetite. So beyond the empty calories that fructose provides, eating it makes you want to eat more.

When I started reducing my sugar intake, I had no intention of cutting it out completely. Reducing my consumption was a gradual process, over many years. Sugar had been used as a reward when I was a child, and sweets were still a comfort food for me. But I found that the less of it I ate, the less I craved it. Today, I barely eat sweetened foods at all. If I were to eat what to most North Americans or Europeans is an "average" dessert serving, I would feel sick. Avoiding sugar is no longer an exercise in willpower; I have developed a revulsion for it. I feel that I have brought my body back to its original state. Sugar, in anything other than small quantities, feels like a poison to me.

Illnesses related to dietary choices do not affect only the individuals who become sick; they affect us all, as a society. The US alone spends $150bn on healthcare resources for illness related to metabolic syndrome. Of course, I would like to think that governmental regulation of a food-item such as sugar is not necessary. I do place value on an individual's right to choose, and on personal responsibility. But in the case of sugar, it's time to get real. The incidence of preventable diseases such as Type 2 diabetes is increasing and many health authorities have expressed concern that our current youth may be the first generation that does not live as long as their parents.

Most of us have known for some time that excess sugar is not good for us, but education and knowledge are clearly not enough. Regulation is required. This is no longer an issue of personal responsibility, but one of public expenditure and public health.

The cost of our habits

By Ardeshir Ommani

 

Altria Group is the leading cigarette maker in the United States. The stock of the company rose 20% in 2011's depressed markets and it's up 50% over the past two years, nearly four times the market's average gain. About two weeks ago, the stock of the company, which is the parent of Philip Morris USA and that of the Marlboro brand hit a 52-week high of $36.40.

The rise in its stock price is influenced by the company's stable cash flow and a dividend yield of 5.5%. At the time when money market rates are less than 0.5%, and the 10-year Treasury is 
yielding less than 2%, the stocks of Altria Group attracts all the attention of the investors who do not ask how many smokers would die this year because of addiction and succumbing to lung cancer. It is worth noting that on December 23, 2011, from Richmond, Virginia, Altria's operating companies launched "Citizens for Tobacco Rights", a nation-wide website to assist the tobacco companies in promoting lowering taxes on cigarette sales.

Although US cigarette sales have been in a severe long-term decline, to be exact, its shipments dropped by a third over the past 10 years, the industry has been able to offset the volume decline with increases in wholesale prices. Naturally after addicting a large segment of the youth around the world, the owners of Altria Corporation are led to raise the cost of their habits and suffering.

The companies have raised cigarette prices by nearly 35% over the past 10 years, even as smokers shouldered huge jumps in federal and state cigarette taxes. Altogether retail prices and additional taxes hiked the cost of a pack to $5.95. This was more than double the rise in overall consumer prices.

This shows that the high rates of profitability in addictive substances is the ideal method of exploiting not only the workers, but also the consumers. The change in the demographics of cigarette addicts has forced the industry to intensify the rate of exploitation of those who can least afford the habit in a long period of economic stress and high rates of unemployment.

The captains of the stock market seem unshaken. The stocks look rich based on their double-digit price per earning ratios. The high rates of profitability in the industry have led the management to implement the strategy of stock buybacks and huge stock awards for management compensation.

Altria is by far the biggest US cigarette maker in both market weight ($61 billion ) and revenue-wise (over $16 billion a year). A substantial share of the company profits are generated outside the US. Philip Morris International, a subsidiary of Altria, sells Philip Morris brand lineups in about 180 countries around the world.

In other words, the men, women and more frequently, elementary-aged children - often at the cost of their lives - are providing these gentlemen in New York and Chicago with lavish life-styles. (Looking at just a few of the advertisements in major corporate newspapers as the Financial Times, New York Times, The Telegraph, etc. directed at this wealthy 1%, we see a woman's handbag selling for $4,000).

In 2009, Altria purchased the smokeless-tobacco producer UST, which makes Copenhagen and Skoal brands at the cost of $11.7 billion. The reason Altria shouldered such a high cost price is that smokeless tobacco is a much-less regulated part of the worldwide cigarette market. Lack of regulations leaves the smokers at the mercy of the tobacco industry. Altria generates in an average $3.5 billion a year in cash flow, most of which ends in the investor's bank accounts in the form of dividends and interests and conspicuous consumption.

As a group, cigarette smokers have lower household incomes than non-smokers and are nearly twice as likely to be unemployed, says a financial officer of Morgan Stanley, a banking corporation. Studies have shown that in communities with higher economic status, its members send their children to better-financed public schools and private universities where environmental sciences and healthier life-styles are emphasized in the educational curriculum from early grade school through university level.

Anti-smoking campaigns partially financed by higher city and state budgets are more predominant on expensive billboards in these higher income communities.

On average a member of this lower economic class spends more than $2,000 annually, smoking a pack a day, the amount that could be allocated towards the present and future sustenance. Smokers, in their attempts to halt casting a large amount of money to the rich, many have traded down to either cheaper cigarettes or bulk tobacco for rolling their own cigarettes.

For this reason, shipments of roll-your-own and pipe tobacco jumped 30% in the first half of 2011. In the brave new world, particularly the Facebook generation age 21 through 29 is no longer fascinated with that rugged cowboy who was for many decades the symbol of Marlboro.

Alongside Altria in the tobacco market stand such giants as Reynolds American, maker of Camel and Pall Mall as well as Natural Spirit brands selling the ugly and more hazardous chewing tobacco brands. To entice new smokers or keep the old ones in the loop, the cigarette companies constantly hatch out new names with new packets. Recently, Philip Morris USA came up with what it calls the "Marlboro Leadership Program" which puts a price cap on what the retailers can charge for a pack of Marlboro in return for promotional incentives, such as a free pack for every carton sold.

While in the US, after years of public pressure, the federal and state governments have imposed some restrictions on advertising and marketing tobacco products, the same companies in the markets of the developing countries promote and glamorize smoking among school children, going so far as to distribute free packs of cigarettes along the pathways leading to schools, the way they did just a few decades ago in the run-down parts of the big cities and the depressed small towns across the US.

Also, the ruling classes of the countries whose economies are dependent on the US and its partners benefit from such relations through providing lucrative markets for the tobacco products of the major international cigarette producers.

It is telling that the gains posted by these tobacco companies in 2011 was skyrocketing when few other stocks were thriving last year. A group of mutual fund managers who tried to avoid negative performance by the end of the year resorted to placing the shares of several tobacco firms among their top holdings.

Gains of more than 20% among the addiction enablers helped these funds outperform their rivals and attracted the moderate savings and the retirement funds of the employed and retired working class. Such is the political economy of the habit-forming industry, addiction of the oppressed and higher rates of profitability.

Ardeshir Ommani is a writer on issues of war, peace, US foreign policy and economic issues. He has two Masters Degrees in the fields of Political Economy and Mathematics Education.

Europe's top industrial firms have a cache of 240m pollution permits

European Commission estimates energy-intensive sector will have accumulated allowances worth €7-12bn by the end of 2012

Damian Carrington
guardian.co.uk, Sunday 19 June 2011 15.38 BST
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ArcelorMittal steel worker
Steel producer ArcelorMittal tops the list of firms with surplus of emissions trading permits, according to thinktank Sandbag. Photograph AP

Some of Europe's largest industrial companies gained billions of euros from the carbon emission rules they lobbied fiercely against, new analysis reveals today.

Ten steel and cement companies have amassed 240m carbon pollution permits from generous allocations, according to a report by Sandbag, the carbon trading thinktank, seen by the Guardian.

The free permits, granted to companies with a market value of €4bn (£3.5bn), can be sold or kept for future use. The European commission estimates that the entire energy-intensive sector will have accumulated allowances worth €7bn-€12bn by the end of 2012.

"More and more businesses see that Europe's future lies in a highly efficient economy with low pollution," Baroness Worthington, Sandbag's founding director, said. "But a small group of carbon fat-cat companies are trying to stop this, in spite of making billions from a windfall of free pollution permits."

The steelmaker ArcelorMittal leads the list of companies in the report, with a current surplus valued at €1.7bn, followed by Lafarge, the cement group.

Tata Steel, in third place with a surplus valued at €393m, last month announced 1,500 job losses at its plants in Lincolnshire and Teesside, blaming emissions regulations as well as the economic downturn. Karl-Ulrich Köhler, chief executive of Tata Steel Europe, said at the time: "EU carbon legislation threatens to impose huge additional costs on the steel industry." Tata Steel declined to comment on the report.

The European Union emissions trading scheme (ETS) puts a cap on the carbon pollution emitted by energy and industrial companies. Those reducing their emissions can sell their spare permits to those who do not. But a combination of initial over-allocation by national governments and the economic decline has left the steel, cement, chemical, ceramic and paper sectors with many more permits than they need. The industries have lobbied hard against calls from governments including the UK for the tightening of the ETS and other emissions targets.

Eurofer, the lobby group representing all of Europe's steelmakers, said last month: "To remain competitive in the free, global steel markets, European steel needs … legislation that does not harm its competitiveness. But we are gravely concerned that EU climate change policy will do precisely that."

Cembureau, which lobbies for the cement industry, takes a similar line, stating: "It would be irresponsible to shift the [emissions] goalposts."

In the UK, the government has proposed incentivising low-carbon innovation by setting a British floor price for carbon from 2013. But this is opposed by the CBI. John Cridland, the director general of the employers' group, said: "It risks tipping energy-intensive industries over the edge."

The government has made some concessions, promising to produce plans later in 2011 to compensate businesses for any competitive disadvantage.

However, independent analysis by Bloomberg New Energy Finance found that the carbon permits held by the steel industry would cover its emissions for the next 12 years. "If the steel sector [on aggregate] did not sell any of its surplus, it would not have a need to purchase emissions until 2023," said Guy Turner at Bloomberg NEF.

The Sandbag report, based on public data, also found that nine of the 10 "carbon fat cats" bought between them 24.4m permits from the cheaper international market, mainly from companies in China and India. These can be used within the EU's trading scheme, enabling companies to retain the more valuable European ETS permits. Furthermore, despite the European companies claiming that tougher emissions rules would drive business overseas, some were paying overseas steel and cement companies for their international carbon permits.

"Purchasing carbon offsets from foreign competitors would not seem to be the actions of businesses genuinely concerned that the ETS will drive business abroad," said Worthington.

Not all companies are resisting the tightening of the European ETS. Five major energy groups, including Britain's Scottish and Southern Energy, last week called for spare permits to be withdrawn, a proposal supported by Sandbag.

"Failure to do so could severely hamper business incentives to invest in low-carbon technologies, as the price signal will be skewed in favour of fossil-based solutions," their statement said.

The Guardian contacted all the companies named by Sandbag. Those who responded argued that the surplus permits arose from decreased production and might be needed when the economy recovered. They said that without protection, steel and cement making would be driven to countries with less CO2-efficient manufacturing practices. Many called for global regulation of emissions

A spokesperson for ArcelorMittal said: "As part of our corporate responsibility strategy, we have decided that any sale of such surplus allowances will be reinvested into projects aimed at the improvement of our energy efficiency footprint, as this will help to reduce our overall CO2 emissions."

Erwin Schneider, at the steelmaker ThyssenKrupp, said: "Companies make decisions based on expected future developments. Any earnings from the past will either have been reinvested already or paid out to shareholders. Therefore it seems to be very misleading to use historic numbers to address our future position."

Market Failure

Market failure is a condition
Created by the private business situation
Inability to produce public goods
Inadequate merit and surplus demerit goods
And hence requiring government intervention

Copyright - Girish Menon