Market failure — practice question

New Zealand is a fairly small economy and it aims to become carbon-neutral by 2050. Carbon-neutrality means that a country removes from the atmosphere the same amount of carbon dioxide that it gives off, or cuts carbon dioxide emissions to zero entirely. A range of policies is now in place to cut external costs in industries such as milk production and the car industry. Both industries are major causes of air pollution, and milk production also damages the surroundings in which many wild animals live. The government plans to end imports of petrol-powered cars by 2032 and also restrict the number of cows that each farmer can keep. Even so, suitable alternatives will need to be found if these goals are to be achieved. Consumers will want a cheaper replacement for petrol-powered cars, while farmers will need another source of income instead of cows. Whether the government’s plans succeed will be important for New Zealand’s macroeconomic performance. New Zealand exporters depend on a clean and green image, and this can support economic growth and cut the deficit on the current account of the balance of payments. However, not every firm will gain from government action to achieve carbon-neutrality and inflation rates may also rise. A shift to a carbon-neutral economy could also increase unemployment because of major job losses in the coal, oil and gas industries. This may raise poverty in some communities and create large losses for the firms that supply these communities. However, these changes may be short-lived and an economy with high mobility of factors of production could avoid these problems. The good news is that New Zealand already has a low level of carbon dioxide emissions. Even so, not all countries can take the path New Zealand plans to follow. For selected countries, Table 1.1 shows their share of world GDP (%) and their share of world carbon dioxide emissions (%) in 2018.