Criterio De Calificación De No Conformidades

Under optimal conditions, the price of any goods or services, including those derived from the environment, provide a signal on its total value to individuals in an economy. A market failure occurs, however, when the ‘true’ economic value of an environmental good or service is not reflected in its market price, even though it may possess a high non-monetary value. Failures in the market can be on the part of buyers or sellers and can create a situation of economic inefficiency, where resources of production, such as labour, land and materials are not allocated in the most optimal manner, resulting in a loss of aggregate social welfare (Bator 1958, Harris 2006, Krugman & Wells 2006, Hanley et al. 2007, Ledyard 2008).

To illustrate the means by which a market failure occurs, it is necessary to consider some basic concepts under the theory of environmental economics, including the terms ‘marginal costs’ and ‘marginal benefits’. The term ‘marginal’ refers to a small change, starting from some baseline level (Hanley et al. 2007). In the production of any good or service, the most efficient economic outcome is considered to be achieved at the point where marginal costs equal marginal benefits as is illustrated in Figure 2-2. The upward sloping line, which is the marginal cost curve (MC), represents the costs associated with the production of any good. It is defined as the change in total cost when the quantity produced changes by one unit (Hanley et al.

2007). As depicted in Figure 2-2, the marginal cost curve is positively sloped to show that the costs of production increase with a greater quantity of production of

any good.

The downward sloping line in Figure 2-2 represents the marginal benefit (MB) curve. It is defined as the change in total benefits when the quantity produced changes by one unit (Hanley et al. 2007).

Figure 2-2 Marginal cost and marginal benefit curves under perfect competition Source: Hanley et al. (2007).

As with the marginal cost curve, the marginal benefit curve can be represented mathematically as:

MB = TB/ TQ

where:

TB = change in total benefits gained from production; and TQ = change in total quantity of production.

In a perfectly competitive market, the point at which these curves intersect (MC=MB) is a situation of equilibrium. At this point, the optimal price is P* and the quantity of goods sold is X*. In economic theory, the notion of perfect competition is meant to serve as a benchmark against which to measure real-life and imperfectly competitive markets (Hanley et al. 2007).

A number of factors can affect the marginal cost curve under real world situations.

Some of these are market failures, and an ‘externality’ is one such example. An externality exists when a person makes a choice that affects other people which is not accounted for in the market price, and is based on the theory of ‘external effects’

from the work of Pigou (1920). As a result of an externality, social costs may be either greater or less than private costs (Figure 2-3). A negative externality is created when the marginal social cost of production is greater than the private cost, and this situation is represented by point B.

Figure 2-3 Marginal cost and marginal benefit curves with an externality Source: Hanley et al. (2007).

When there is a negative externality, in an unrestrained market, the quantity of goods produced (X) is more than it would be if private and social marginal costs were equal. The unit price (P) of would also be lower. By increasing the price to P*, and lowering the quantity produced to X*, an economic instrument can be used to bridge the gap between the private costs and social costs. Through this process, the entities causing harm to the environment will bear the associated costs and damages suffered by the rest of society (Hanley et al. 2007).

In addition to externalities, there are other types of market failure that can also create a divergence in private and social costs. For example, open-access resources which are common property, in the absence of restrictions can result in greater use than if users pay for it, leading to the well-known ‘tragedy of the commons’. The notion of market failure in common property is based on the theory that any natural resource had some optimal rate of use (Hanley et al. 2007). Public goods are another type of market failure, which can result in situations where the benefits gained from resources are not remunerated (Harris 2006, Hanley et al. 2007).

Environmental policy approaches

To correct a market failure, the government can intervene directly in the economic process through some form of environmental policy. A policy can be defined as ‘a set of instructions from policy makers to policy implementers that spell out both goals and means for achieving these goals’ (Rist 1995, p. xviii) and also a ‘course of action or inaction chosen by public authorities to address a given problem or

interrelated set of problems’ (Pal 1992, p.2). Environmental policy can take various forms and operate across a broad spectrum of approaches. In theory, policy instruments are generally grouped under three main categories (Lorentson 1988, Dovers 2005) (Table 2-8). Legislation or command-and-control instruments are the most common types of environmental policies used, and pertain to regulation dealing with ‘permission, prohibition, standard setting and enforcement’

(Harrington & Morgenstern 2004).

Table 2-8 Spectrum of environmental policy approaches

Type of policy Approaches and assumptions in creating

environmentally responsible behaviour Legislation and regulations

e.g. Environment protection and biodiversity act 1999 Sea installations permits 1987

Enforcement of regulation is based on the assumption that people are self-interested and have to be forced into acting in a responsible way Economic incentive-based instruments

e.g. Water market charges

Environmental performance bonds for mining

Monetary incentives are based on the assumption that people are self-interested and mainly interested in monetary rewards

Information & education-based strategies e.g. National Landcare awards

Australian sustainable schools initiative

Based on the assumption that education and knowledge can direct people into acting for the public good

Source: Thomas (2007).

The second set of approaches comprise of economic incentives, whose primary goal is to correct market failures and reflect the ‘true’ prices of environmental commodities. Economic strategies, in their purest form, can be distinguished from regulatory approaches, in that they aim to operate freely, with minimum specification of what must be achieved, or what must be done to achieve it.

Regulation on the other hand, explicitly specifies what must be done and how it must be done. There are, however, various strategies that lie in-between, comprising of various mixes of regulation and free market operation.

Environmental economists have long argued that environmental policy should be based more firmly on the use of market-based mechanisms, such as environmental taxes and tradable permits which, for example, integrate the environmental costs of pollution clearly into the economy (Pearce & Barbier, 2000). Their central argument is that ‘traditional’, standards-based ‘command-and-control’ regulation is economically inefficient because it imposes uniform obligations on various entities, regardless of their ability to control environmentally damaging practices. This can appreciably increase compliance costs and create industry resistance to future environmental regulation of any description. Economists also consider regulatory approaches to be environmentally inefficient, where for example, in the case of pollution, polluters have few incentives to reduce emissions beyond standards set by government. Market-based mechanisms, on the other hand, can create a constant price pressure for improvement (Pearce & Barbier, 2000).

Bates (2001, p.7) considers legislative approaches as comprising of a “complex regulatory web that is uncertain in its application and inefficient in its approach”.

The Commonwealth of Australia (2001) and United Nations Environmental Programme (UNEP) (2002 p.22) find that ‘despite an explosion of a number of legal instruments, many key aspects of environmental health continue to decline’ around the world.

The third type of environmental policy instrument is the social approach, usually based on advocacy, generally created through education and persuasion (Hollick 1984, Bridgman & Davis 1998). Generally considered to be non-coercive forms of action, tools such as awards, public information, product labelling, public ‘right to

know’ and environmental agreements are used to inform and persuade people to pursue more environmentally sustainable behaviour (Thomas 2007). Robinson (2001) notes, however, that moral suasion approaches are less effective than economic incentive based approaches.

Environmental policy-makers recognise that decision making is influenced, not only by a wide variety of natural phenomena, but also behavioural forces (Costanza &

Folke 1997, Goulder & Kennedy 1997). Therefore, policy must not only focus on governance of natural resources, but the entities involved. It must recognise that the unsustainable use of resources is then layered by various complexities inherent in their interactions (Costanza 1989, Pearce & Atkinson 1993, Limburg et al. 2002, Ekins et al. 2003, Daly & Farley 2004, Erickson & Gowdy 2005). Any approach must take into consideration differences in the political, legislative, administrative, regulatory and judicial context of the area, and the more successful approaches comprise of a mix of various policy instruments (Thomas 2007).

Welfare theory and role of government

This thesis also draws on some important principles described under welfare theory, especially in relation to policy approaches in addressing coastal disaster risk. This is a branch of economics that provides a framework for the analysis and management of public policy. Its primary aim is to define economic strategies that can enable society to move closer to an optimal level of wellbeing. Since it was first proposed, this framework has been used to evaluate various kinds of public policy over the last

50 years, such as health care, telecommunications and public infrastructure (Just et al. 2004, Aakre et al. 2010). Welfare theory proposes that the best outcome can be achieved by the economy working freely, without government intervention (the laissez-faire approach), provided that the conditions of a free market economy are met. Others argue that the government must intervene to redistribute resources among the various entities for the best economic outcomes, and this is known as the public interest approach. The received wisdom among most economists is that the government allows the economy to function freely, and intervenes only to provide market enhancement functions, or correct market failures.

2.5. Conclusions

Australia’s historical experience of major natural disasters has resulted in a significant evolution of disaster policy, from its early focus on response, to more long-term actions to reduce community vulnerability. Under the umbrella of climate change, coastal disaster risk has been brought to the forefront of current disaster policy and catalysed a great deal of work, not only in relation to sea-level rise, but also prompted investigation of other risks, such as inundation created by storms and cyclones. While there has been some work on the economics of natural disaster risk, there appears to be no research in Australia that has explicitly focused on the nexus of coastal disaster risk, economics and the environment.

Internationally, economic aspects of coastal disaster risk have mainly used the lens of ecological economics to analyse linkages between environmental degradation, planning and vulnerability. Environmental economics, a longstanding sub-discipline,

used to provide a deeper understanding into the economic roots of environmental failures, does not, however, appear to have been extended to the area of coastal disaster risk. The aim of this thesis is to advance knowledge in this area. It uses the framework of environmental economics to bridge the knowledge gap in this area, particularly with regard to understanding market failures in risk-prone coastal land created by property developers and buyers on the one hand, and government failures on the other. The next chapter provides a background on Exmouth, the case study site which will lead into a discussion of these failures in the local context that undermine the resilience of this cyclone-prone town located in north-western Australia.