Environmental Issues and Policies — Negative Externalities, Elasticity, Merit-Good Intervention and Sustainable Growth

Answers

(a) Trend in the growth rate [1] — summarise

The growth rate of the textiles and apparel industry generally decreased from 2013 to 2017.

(b) Why factories and government differ on waste disposal [3] — explain

Both are rational decision-makers but with different objectives. Textile factories aim to maximise profit, so they choose the cheapest means of waste disposal to minimise their private cost — ignoring the negative externality (the external cost of river pollution borne by the 28 million people who depend on the Citarum). The government aims to maximise society’s welfare, so it accounts for the external cost (where marginal social cost exceeds marginal private cost) and engages in patrols and clean-ups to reduce it. The divergence in attitudes follows from the divergence in objectives — private profit versus social welfare.

(c) How marketing boosts sales volume [3] — explain

Successful marketing shifts consumers’ tastes and preferences toward Indonesian textiles, raising demand and so raising both price and quantity. Because production has become more capital-intensive (digital technology and automation, Extract 2), the supply of textiles is price-elastic (PES > 1): the rise in price induces a more than proportionate rise in quantity supplied, boosting firms’ sales volume.

(d)(i) Why intervene in the market for EET [5] — explain

EET generates a positive externality: the wider community benefits when individuals and firms make environmentally responsible decisions, so the marginal social benefit (MSB) exceeds the marginal private benefit (MPB). Left to the free market, consumption settles at Qp where MPB = MPC, below the socially optimal Qs where MSB = MSC. There is therefore under-consumption and under-allocation of resources, with a deadweight welfare loss over Qp–Qs (where MSB > MPB). The government’s commitment to the “ideal level of consumption” reflects its aim to correct this allocative inefficiency.

(d)(ii) Should EET be free? [8] — assess

Thesis: free provision corrects the failure. Setting the price of EET to zero raises consumption to Qs, where the deadweight loss is eliminated and allocative efficiency is restored. With no price barrier, households and firms are far more likely to attend, supporting the “move forward fast” urgency (Extract 3).

Anti-thesis: free provision may overshoot or be costly. The government may mis-estimate MSB. If the true MSB is lower than estimated, free provision pushes consumption beyond the true optimum, causing over-consumption and a new deadweight loss. Free provision also strains the government budget (opportunity cost of the funds), and if PED for EET is inelastic, even a fall to zero price may raise quantity demanded only modestly.

Judgement. Whether EET should be free depends on whether free provision targets the root cause. If the under-consumption stems mainly from imperfect information — low awareness, as Extract 3 suggests — then public education addresses the cause directly and may be more effective and cheaper than blanket free provision, which treats the symptom (price) rather than the cause (ignorance). Free provision is justified only if cost, not awareness, is the binding constraint, and only where MSB can be estimated with reasonable accuracy.

(e) Is prioritising growth and the environment together desirable? [10] — discuss

An approach prioritising both is a pursuit of sustainable growth — sustained growth without sacrificing the environment for future generations. It is “desirable” if its benefits outweigh its costs.

Desirable. Investment in green technology (Singapore, Extract 4) yields more efficient, lower-emission production, lowering unit costs in the short run and raising productive capacity in the long run — raising both SRAS and LRAS for sustained growth with less pollution. Higher real output raises material living standards, while lower unemployment and reduced environmental damage raise non-material living standards; Singapore’s water sector turned scarcity into GDP and jobs. For Indonesia, where textile pollution causes overproduction and allocative inefficiency, the approach directly corrects a pressing market failure.

Costly / limited. Supply-side green-technology investment has uncertain outcomes realised only in the long run; in the short run, lacking proven green technology, a government may struggle to deliver both growth and protection at once. The opportunity cost is significant — funds spent on green R&D cannot be spent on reskilling an ageing workforce (acute for Singapore), potentially yielding slower growth as capacity expands less.

Judgement. The desirability turns on a country’s resources and stage of development. For a developed, fiscally capable economy like Singapore, prioritising both is clearly desirable — it has the resources to invest in green growth and reap long-run dividends. For Indonesia, a developing economy with severe, immediate environmental damage but tighter fiscal constraints, the approach is desirable in principle but harder to fund, so it must be sequenced and targeted (correcting the worst externalities first). The strongest position is that the approach is desirable for both, but the feasible pace differs with each country’s fiscal capacity and development stage.