Market Failure, Negative Externalities, And The Australian Transport Industry

Negative externalities in the Australian Transport Industry

The economy of a countries is contributed by production and consumptions of products and money supply. Generally, greater economies record higher production and consumption rates. The Australian economy is a huge mixed- income economy that recorded a gross domestic product of AUD $ 1.69 trillion in 2017. The service industry is a huge contributor to the growth of the Australian economy accounting to 61.1% of the gross domestic product and absorbing nearly 80% of the country’s labor force. The increase in production in most of these sectors yields either positive or negative externalities.  Externalities are consequences of economic activities that affect third parties (Cherry, Kallbekken & Kroll, 2017). The pollution of the environment resulting from emission of greenhouse gases during production processes is an example of a negative externality.

The transport industry in Australia is vital to the country’s productivity and growth. In modern economies, the sector is critical since it facilitates mobility of people and goods. Road transport is the most used method of transport used by individuals and businesses.  Businesses are able to ferry their goods to the market while also channeling raw materials to production centers. Conversely, the benefits obtained from the sector is accompanies by negative consequences such as air pollution. Market failure is a situation where goods and services allocated by a free market economy are in efficient resulting to a net loss in social welfare (Bento, Kaffine, Roth & Zaragoza-Watkins, 2014). This study shall discuss the concept of market failure resulting from negative externality with reference to the Australian transport industry.  The research would proceed to illustrate using economic theories the market structures that exist. Finally, the efficiency of the transport industry shall be discussed by comparing industry figures and that of a perfectly competitive economy.

Externalities can either be positive or negative depending on its impact on society. The transport industry like many other industries that contribute to the world’s economy create both negative and positive externalities. Greenhouse gas emissions, traffic congestion, and car crashes are major negative traffic externalities that characterize the transport sector. Negative externalities are accompanied by costs such as medical care on patients of air pollution and car crashes (Daraio et al, 2016).  The society bears the burden of negative externalities since producers cannot pay for them in full. The environmental pollution caused by increased activity of the transport sector negatively affects the society. Air pollution predisposes individuals to respiratory diseases. Even though the government charges road users toll fees, the total amount generated might not be able to compensate the cost of treating the populations infected by the diseases. Therefore, market failure arises since the cost of air pollution is greater than the benefits obtained from the transport industry.

The Australian Government Intervention to Control Negative Externalities

The objective of the society is to reduce externality cost to zero. Constantly, a society with no externalities is undesirable since economic activities yield social advantages.  Banning vehicles to get rid of traffic congestion and environmental pollution is undesirable since driving vehicles yield social benefits. Economic theory that assume an ideal environment, argue that a socially optimal point of externality is when marginal social cost equals the, marginal social benefit (Demir, Huang, Scholts & Van Woensel, 2015). Outside this optimum point, the society’s welfare could be controlled by altering the level of production. Theory suggest that the optimum level of activity while combating greenhouse emissions is a point where marginal cost of abatement matches the marginal benefit of abatement. The determination of the right level of activity is nearly impossible in practice.

The transport industry in Australia is marred by several negative externalities that increase with the level of production. Vehicles emit considerable amount of greenhouse gases in to the atmosphere. The vehicle manufacturing processes is accompanied pollutants such as sulphuric and nitric acids that is released during smelting processes (Fike & Gwartney, 2015). Also, pollution can take the form of noise pollution which occurs as a result of high frequency sounds produced by running vehicles. Generally, pollutants have a negative impact on quality of life of individuals since they might result to the development of diseases. Asthma and tuberculosis are common diseases that might be caused by inhalation of poisonous gases. The environment is an important scarce resource that should be conserved for a better human living (Holmgren, 2018). The release of pollutants in to the atmosphere by agents of the transport sector poses a risk to the sustainability of the environment and to the lives of inhabitants of the environment.

Traffic congestion occurs when many vehicles pursue too small road space. The increase in income among Australians and a fall in prices of vehicles has led to an increased demand of cars (Johnson, 2015). The average travel times has been increased by 28 percent costing the economy about $3.54 billion yearly. In Melbourne and Sydney, motorists spend 27 extra minutes on the road and thus leading to huge losses for businesses. Higher traffic congestion lead to more noise pollution as a result of frequent horns made by motorists. The best solution for traffic congestion is improving the road network through the construction of newer roads and creation of bypass channels and motorways that drive away traffic form urban centers. Improved road infrastructure would result to shorter journey times and decline in transport cost incurred by businesses and individuals. Encouraging the use of public means of transport reduces the number of private cars on the roads and hence reducing traffic, pollution, and cost of transport

Ways to Address Market Failure and Negative Externalities

Human activities remain the most influential aspects in climate change. Currently, people account for about twenty-six billion tons of carbon dioxide emissions annually. This is a large proportion in comparison to what the natural factors produce. Firstly, greenhouse gas emissions from burning fuels are some of the primary contributors to global warming (Mazzucato & Penna, 2016).  While it is evident that the effects the natural factors subside within a short period, researchers found that the footprint of the greenhouse gases tends to live for a very long time because of the amount (Ring, Lindner, Cross, & Schlesinger, 2012). Carbon dioxide dissolves into the ocean with time, normally taking several years. However, human activity, especially through factories and motor vehicles, emits more and more carbon dioxide into the environment, which makes the process of cleaning it out even more difficult.

Most advocates of public transport argue that owners of motor vehicles do not pay for the social cost associated with motoring. Although the pay for the cost of running vehicles, they fail to pay the cost of negative externalities. Taxes and charges are channels where motorists indirectly contribute to the provision of social amenities to people. Tax is a contribution to the state by individuals and enterprises. The tax revenue collected by the state is used in the provision of social services such as health, education, and security (Loo & Banister, 2016). Noting the estimated $20.4 billion per year economic cost of congestion by 2020 as per the Victorian Auditor general, the Australian government has increased taxes on road space to tackle the congestion problem. Increasing the taxes on road use reduces the demand since many individuals would prefer using public transport means.

Firms should take responsibility of the negative externality caused by their production. The solutions to negative externalities should not entirely be left to the government. Motorists for instance should maintain their vehicles appropriately through servicing to ensure that air pollution is kept low. Government should also promote investment in rail transport so at to reduce pollution and reduce traffic congestion (Profillidis, Botzoris & Galanis, 2014). Trains operate on a fixed schedule that ensures that it operates within the set timelines. Luggage and passengers would reach their destinations in time. Citizens should be made aware of road safety measures to minimize cases of pedestrian caused accidents. Public transport vehicles of high capacities such as buses should be used for public transportation purposes to ease traffic as a short term to medium term measure. Highways should also be designed in accordance with international urban planning standards to ease traffic especially in big cities such as Sydney and Melbourne.

The Efficiency of the Australian Transport Industry

Market structure is defined as the features of a market that determine its organizational and competitive features. The prevailing market structure of an industry dictate the business strategy of the industry including pricing policies. The prevailing industry market structure is determined by the number of firms, buyers, and nature of products, barriers to entry, economies of scale, and the degree of product differentiation within the industry. The Neo-classical economic theory of firms distinguishes firms in to four major categories based on market characteristics and assumptions (Stiglitz & Rosengard, 2015). A perfect competition market structure is a market characterized by many sellers, standardized products, little barriers to entry, and no none price competition. The penetration of information in this market structure is high and with no time lags. This makes buyers and sellers to have perfect knowledgeable of products and prices that prevail in the market.

Monopolistic competition markets structure is an imperfect market characterized by massive competition. The retail business is a good example of this market. The products offered by sellers are similar although might not have perfect substitutes.  The similarity of products in the industry calls for competitive strategies such as advertising and product differentiation (Urry, 2015). There is little barriers to entry enabling new sellers to easily enter the market resulting to many sellers. The degree of market power among companies operating in the market is relatively low and hence decisions made by one participant might not significantly affect the operation of other firms. Demand in a monopolistic competition market is highly elastic implying that demand is highly sensitive to change in product prices. The short run profit for companies operating in the industry is positive although in the long run, economic profit tends to zero.

Monopolistic markets are a rare type of market structure in the private sector. Government dominated industries are majorly monopolistic with considerably high barriers to entry. The high entry barriers is attributed to massive technological and capital investments needed to fairly compete with the established firm. Governments might make legislations that would limit the entry of other sellers in the market to one. The monopolist makes massive super normal profits in the short to long run. Buyers of products and services offered in a monopolistic market are price takers since the sellers has the power to set prices that would optimize their profits. Unlike in a monopolistic competition market, products lack close substitutes. The demand for products offered by monopolists are price inelastic since a rise in prices would result to insignificant change in sales volume. The buyers and sellers in this industry have imperfect information concerning the prices and quality of products offered.

The banking, supermarket, and liquor retailing companies are major monopolized industries in Australia. More than 80% of the market share is controlled by big four companies in each of these sectors to an extent that new entrants face huge barriers in their attempts to enter the market. In addition to capital and technological advantages, some Australian monopolies are characterized are backed by government legislations which act as barriers against new entrants. The Australian Post, a firm that deals with the provision of postal services is a good example of government- owned monopolistic firm.

A market structure is said to be an oligopoly when it is characterized by few sellers, differentiated products, and high barriers to entry. Oligopolies are a common structure in the Australian business environment.  The banking and retail sectors exhibit this market structure. The number of banks are relatively low compared to retail businesses. These firms have significant market power. These companies can also decide to work together as cartels or compete against themselves. Oligopolies have the advantage of securing abnormal profits in the long run. The table below provides a summary of the four types of market structures present in the economy.

Table 1: Characteristics of Market structures

The Australian transport firms operate as oligopolies. They offer transportation services to individuals by ferrying people and goods. Study reveals that the efficiency index and the performance of companies in this industry is nearly the same. The technologies used across the industry are also close to similar. Customers of firms offering taxi services use mobile applications, telephone, and email platforms to make booking arrangements with the taxi drivers. The aviation industry in the country is offered by few flight companies offering slightly differentiated or standardized services. Customers select from business and economy class flights in all firms. The railway transport industry also is dominated by few companies. The barriers to entry are also significantly high making it difficult for new entrants to enter the market (Nakurney & Li, 2014). The firms operation in the public transport industry aim at providing customers with high class customer service as a differentiation and competition strategy. The prices charged by sellers are almost similar with little degree of variance.

Efficiency of an industry is a quantitative measure of how the subject’s operations are conducted. The transport sector is a crucial sector in the economy of every country. It facilitates the running of the other industries running in the economy. Transportation enables the mobility of labor and capital and thus companies to optimally allocate their resources across production centers (Xia, Nitschke, Zhang, Shah & Crabb, 2015). This study discusses the efficiency of the transport sector in Australia an efficient transport industry ensures that goods and services timely arrive at the markets and thus reducing perishability.  An efficient transport industry also ensures that individuals reach their working destinations in time. The efficiency of the means of transport in a country promote the operations of all sectors that depend on transport services.

The freight transport sector in Australia has grown rapidly due to the growing economy and international trade. The sector has yielded significant service to economic growth. However, the sector is still relatively inefficient. The causes of inefficiency include an outdated regulatory environment, and improper infrastructure. The importance of the transport industry is a matter of concern to the government and the general public since it is demanded by economic activities that are continuously growing (Rodrigue, Comtois & Slack, 2016). Juturna consulting in its analysis of the Australian road transport reported that the road system is in a poor condition. Safety standards, national efficacy and social connectedness were identified to be below standard.  The safety of road users and their freight is important and thus safety should always be maintained high. Better safety standards would be achieved through construction of good road infrastructure that takes in to consideration the safety if its users. The country through the National Road Safety Strategy aims to facilitate collaboration in issues of road safety improvement. The objective of the entity is to reduce deaths occurring as a result of road accidents. In 2016, the authority recorded 1296 deaths, a 9.1% decline from the 2008-2010 value of 1426. Road crashes also declined from 1297 in 2008 to 1203 in 2016, a 7.3% decline irrespective of the rise in the number of vehicles operation on the roads.

The traffic congestion in Australia is still high especially during peak traffic hours. High congestion increases the rates of accidents, increases noise pollution, and inconveniences road users. It is estimated that traffic congestion on the roads increases the overall travel times by 28%, costing businesses around $3.54 billion annually. GPS navigation firm in its 2016 report reported that travel times had risen by 3% in 2015 (Maniatopoulos, Andrews & Shabani, 2015). Tuesdays and Monday morning are highly affected by traffic congestion especially in major cities if Melbourne and Sydney. The congestion in major cities is attributed to high population which raises the demand for road transport.

The transport sector in Australia faces high energy inefficiency. Energy efficiency in the transport industry is achieved when the energy required in the running of locomotives has been reduced to economical levels.  Energy inefficiency implies that Australians use more energy to travel a unit kilometer using land transport means compared to developed countries such as the United States (Karndacharuk, Hassan & Karl, 2018). The increase in inefficiency is associated with the high increased investment in road transport at the expense if urban rail networks. Road transport consume more energy compared to rail transport which transports higher amounts of luggage.  

Conclusion

The transport industry is an important component of economic development. It facilitates the movement of goods and services from one location to another. However, market failure occurs when the hazards resulting from running the business is not fully covered by the producer. The remaining burden is then incurred by the society. The negative impacts of gas emissions emitted by cars, planes, and trains pollute the environment. The pollution predisposes individuals to respiratory diseases and other ailments. Although, producers pay tax to the government used to support environmental hazards and provision of social amenities, they are unable to the pay the whole cost of their operation. Environmental pollution and road congestion are other negative externalities that lead to market failure in the industry.

The government plays a critical role in addressing negative externality in the Australian transport industry. It achieves this by levying taxes on sellers such as taxi operators, car manufacturers, and public transport operators among other players. The government uses the money generated in the provision of social amenities and public goods to the citizens at affordable prices.  The government regulates production in the industry by restricting the entry of new sellers. As a measure of reducing traffic congestion, government advises individuals to use public transport.

The Australian transport industry is inefficient. Road traffic and accidents are still high. Good roads and citizens who have full knowledge of traffic rules and safety standards minimize occurrence of accidents. Transport infrastructure that meet safety and quality standards also promote efficiency of the industry. The Australian roads are below required safety standards placing car crashes at a high. Generally, the country’s transport sector has not achieved the desirable energy efficiency. Energy consumption is still way high above economical levels making the cost of land transport expensive.

References

Bento, A., Kaffine, D., Roth, K., & Zaragoza-Watkins, M. (2014). The effects of regulation in the presence of multiple unpriced externalities: Evidence from the transportation sector. American Economic Journal: Economic Policy, 6(3), 1-29.

Cherry, T. L., Kallbekken, S., & Kroll, S. (2017). Accepting market failure: Cultural worldviews and the opposition to corrective environmental policies. Journal of Environmental Economics and Management, 85, 193-204.

Daraio, C., Diana, M., Di Costa, F., Leporelli, C., Matteucci, G., & Nastasi, A. (2016). Efficiency and effectiveness in the urban public transport sector: A critical review with directions for future research. European Journal of Operational Research, 248(1), 1-20.

Demir, E., Huang, Y., Scholts, S., & Van Woensel, T. (2015). A selected review on the negative externalities of the freight transportation: Modeling and pricing. Transportation research part E: Logistics

Fike, R., & Gwartney, J. (2015). Public choice, market failure, and government failure in principles textbooks. The Journal of Economic Education, 46(2), 207-218.and transportation review, 77, 95-114.

Holmgren, J. (2018). The effects of using different output measures in efficiency analysis of public transport operations. Research in Transportation Business & Management.

Johnson, M. (2015). Public goods, market failure, and voluntary exchange. History of political economy, 47(suppl_1), 174-198.

Karndacharuk, A., Hassan, A., & Karl, C. (2018, May). Principles and practices for road transport management. In ARRB International Conference, 28th, 2018, Brisbane, Queensland, Australia.

Loo, B. P., & Banister, D. (2016). Decoupling transport from economic growth: Extending the debate to include environmental and social externalities. Journal of Transport Geography, 57, 134-144.

Maniatopoulos, P., Andrews, J., & Shabani, B. (2015). Towards a sustainable strategy for road transportation in Australia: The potential contribution of hydrogen. Renewable and Sustainable Energy Reviews, 52, 24-34.

Mazzucato, M., & Penna, C. C. (2016). Beyond market failures: The market creating and shaping roles of state investment banks. Journal of Economic Policy Reform, 19(4), 305-326.

Nagurney, A., & Li, D. (2014). A dynamic network oligopoly model with transportation costs, product differentiation, and quality competition. Computational Economics, 44(2), 201-229.

Profillidis, V. A., Botzoris, G. N., & Galanis, A. T. (2014). Environmental effects and externalities from the transport sector and sustainable transportation planning–A review. International Journal of Energy Economics and Policy, 4(4), 647-661.

Schlesinger, M. E., Ring, M., Lindner, D., Cross, E., & Prince, V. (2014). Fair Plan 5: A Critical Appraisal of Five Congressional Bills to Reduce US CO2 Emissions. Atmospheric and Climate Sciences, 4(05),

866.

Rodrigue, J. P., Comtois, C., & Slack, B. (2016). The geography of transport systems. Routledge.

Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth international student edition. WW Norton & Company.

Urry, J. (2016). Mobilities: new perspectives on transport and society. Routledge.

Xia, T., Nitschke, M., Zhang, Y., Shah, P., Crabb, S., & Hansen, A. (2015). Traffic-related air pollution and health co-benefits of alternative transport in Adelaide, South Australia. Environment international, 74, 281-290.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order