Africa’s resource paradox and market failure

I have blogged a few times on the resource curse that affects some developing countries but it seems that in Africa a lot of resources go unused when they are actually demanded in an economy. There seems to be a lack of planning for supply and demand and build an infrastructure linking the two. The Economist came up with some good examples of this:

  • Ghana – generation vs distribution. The country produces too much electricity as Ghanaian usage per year equates to what someone in the US uses a fortnight. More than 25% of households in Ghana are not connected to the grid and 25% of electricity is lost due to derelict distribution infrastructure and theft. With regard to oil, Ghana spent over $4.7 billion on importing petroleum last year, despite having domestic petroleum refineries which are lying idle – they could produce 30% of its petroleum needs.
  • Uganda – like Ghana supply is greater than demand as capacity if nearly double peak demand. Trucks wait on the side of roads even though traders can’t find vehicles to transport their goods.
  • Ethiopia – largest livestock in Africa and tanneries to turn hides into leather but shoe and glove makers import leather from China. Local tanneries are concerned with how the leather is treated.
  • Nigeria – tomato-processing plant to make tinned paste but closed down due to crop failure caused by a voracious moth

Another issue is the completion of infrastructure projects – according to McKinsey approximately 80% of African infrastructure projects fail in the cost benefit analysis stage whilst fewer that 10% get the stage of acquiring funding. For Africa to further development there has to be some acknowledgement of market failure and a willingness to separate commercial power and political power amongst its government officials.

Source: How market failures are holding Africa back. The Economist 5th May 2022

For more on Market Failure and Development Economics view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.


Externalities of Food

Informative video from the FT that looks at the externalities of food covering – environmental cost, health costs and social costs. It focuses on the ‘True Cost Accounting’ and uses the example of coffee where a 1 kilo bag from Brazil costs $2 but the real cost is around $5.17 when you include that farmers are underpaid, there is unsustainable water use, air pollution, climate changing energy supplies and land degradation.

To encourage greater sustainability Rabobank introduced ‘The Rabo Impact Loan’ which is a low-interest business loan created especially for farmers that have a high sustainability performance. Good introduction to market failure.

Quota and Allocative Efficiency

Below are notes on Quota and Allocative Efficiency from elearneconomics.

When the government imposes a quota (a restriction on the quantity that can be produced, exported or imported) it forces the market price up and decreases the quantity sold or produced. Because the market is not allowed to clear (restore or reach the equilibrium) there is a loss of allocative efficiency (termed a deadweight loss). Part of the original consumer surplus and producer surplus is not picked up as part of the quota. Consumer surplus and producer surplus are no longer maximised.


At the original equilibrium (P1, Q1) the value of consumer surplus for butter is $80m (0.5 x 40m x $40, area P3CP1) and the value of producer surplus for butter is $160m (0.5 x 40m x $8, area P1CP0), the market is allocatively efficient because consumer surplus and producer surplus are maximised. When the government imposes a quota and restricts the quantity to 30m (Qs) there is a change in consumer surplus, producer surplus and allocative efficiency.

The total value of consumer surplus decreases by $35m because consumer surplus before the quota was $80m and is now $45m (0.5 x 30m x $3, area P3BP2). The higher price means that the difference between what consumers are willing to pay and what they actually pay will decrease. The lower quantity demanded (30m units rather than 40m units) means there are fewer units from which wool buyers can gain a surplus. Therefore, consumer surplus will decrease.

The total value of producer surplus increases by $20m because producer surplus before the quota was $160m and is now $180m ($9 plus $3 divided by 2 multiplied by 30m area P2BFP0). Producer surplus will increase despite some loss of producer surplus due to the lower quantity sold, 30m (Qs) rather than 40m (Q1). The increase in producer surplus is a result of the higher price from the quota that is more than sufficient to offset the loss of producer surplus due to lower sales. Overall producer surplus increases.

There will be a loss of allocative efficiency because the loss in consumer surplus (CS) of $35m outweighs the gain in producer surplus (PS) of $20m, which results in a net welfare loss (deadweight loss) of $15m (0.5 x 10m x $3, area BCF). This is because producer surplus and consumer surplus are no longer maximised following the imposition of the quota on butter.

More at:

New Green Deal – more about politics than economics

In Unit 3 of A2 CIE economics course you will no doubt have come across externalities – see graphs below. In simple terms the cost to the consumer must also be accompanied by the external costs (referred to as externalities) which is normally not paid by the consumer. Externalities are common in virtually all economic activities. They are defined as third party (or spill over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid.

Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. The study of externalities by economists has become extensive in recent years, not least because of concerns about the link between the economy and the environment.

This all seems very straight forward as you would assume the external cost (externality) of driving a car (emissions) would be added to the private cost of running the car (petrol etc). However carbon taxation is politically elusive as only 20% of global emissions are covered by schemes that put a price on carbon and only 1% of emissions subject to such schemes face a price as high as $40 per tonne of carbon dioxide. The Green New Deal proposes to a move to a 100% clean and renewable energy within a decade or two, and to zero net emissions by mid-century. Those who support the idea are sceptical about costs and funding as decarbonising the economy will require some serious capital.

For the Green New Deal to work it must mobilise a majority that are more passionate than the remainder. A carbon tax with a dividend may be appealing but the financial benefits are small when divided by the number of voters. Remember that an associated tax would encourage an aggressive response from wealthy fossils-fuel firms. A Green New Deal, in contrast, might promise sufficient goodies to organised interest groups, such as labour unions and domestic manufacturers, to gather a winning political coalition.

Some see the Green New Deal is something more radical. Roosevelt saw the Depression as both a threat to liberal democracy and the product of an economic system that put profits ahead of the welfare of the working man. Similarly, left-wing activists view climate change as the result of unbridled capitalism. They aim to solve it by redistributing economic and political power.

Source: The Economist – A bold new plan to tackle climate change ignores economic orthodoxy. 7th February 2019

Market Failure: Ebolanomics

ebolaJames Surowiecki wrote an interesting piece in the New Yorker about the deadly outbreak of Ebola and the fact there is no real medication to stop it. Ebola was discovered in 1976 and although there has been no drug approved to treat the disease this is not surprising.

A pharmaceutical company is a business and they will direct investment into medication that they see will generate income for them which will ultimately satisfy the shareholders. Therefore it makes sense for them to target higher income groups that have the purchasing power to buy the medication. Furthermore it is in their favour that the medication needs to be ongoing e.g. drugs for lowering your cholesterol. Although this works quite well in developed countries it does lead to significant underinvestment in diseases and certain categories of drugs. Ultimately the big pharmaceutical company does not see the developing world as a potential market for their products. Therefore diseases like malaria and tuberculosis receive less attention from companies than high cholesterol. However initially Ebola looked like a bad investment as it was confined to West Africa but as it has now spread to the developed world investment might start to be more prevalent.

The big question that Surowiecki alludes to is how do we get the drugs we need without transforming the industry. One way would be for the government to make a payment to a company and in exchange the company would give up the right to sell the product and therefore save on all the marketing costs. Furthermore public health officials would be able to control how it was promoted and used. Economists see payments as cost-effective as you only have to pay if the product works and it encourages investment into public goods where the benefits extend not only to the consumer but to third parties – e.g. vaccinations etc.

Negative Externalities – Information Failure and Obesity

ObesityOne of the biggest threats to world health is that of obesity and sugar is the source of the weight gain amongst many people. It is ironic that sugar consumption was accelerated in the 1980’s after it were introduced into processed foods to deal with the health scare concerning saturated fats. Governments are now becoming more aware of this issue as it starts to absorb their health budget – UK spends £4bn on obesity related health issues. Norway, Mexico and the states of California and Illinois have introduced a tax on full-calorie soft drinks. Taxing sugar drinks does increase the cost of consumption and generates revenue to pay for the health costs that the overweight impose on society. But are there other options that they should be trying? Taxation might reduce some consumption but information about public awareness could be a more efficient option.

Information about sugar – a better solution?

A simple solution to obesity is to eat less and take more exercise. The World Health Organisation recently halved its recommended daily allowance, saying we should have no more than six teaspoons a day – less than one fizzy drink. However much of the sugar we consume is hidden within processed foods – high-fructose corn syrup which is a cheaper alternative to sugar. Food needs to be properly labelled and it is interesting to see the UK government are changing the way foods are labeled to assist shoppers to monitor their intake of harmful food using a simple traffic light system. But it doesn’t help that the US and EU governments still subsidise sugar production. However the real aim of focusing on sugar is that we start to lead healthier lives.

Free-Riders with fire insurance

NZ Fire ServiceThis maybe useful for Unit 3 of the AS course. The Fire Service in New Zealand is currently funded on levies on fire insurance. However the incidence of fires in the last 20 years has dropped dramatically and the fire service has increasingly been attending to tasks not related to fires – this includes emergency situations like flooding, car crashes, hazardous waste problems to name but a few.

The New Zealand Herald mentioned that approximately 19% of calls for the Fire Service are transport-related incidents but only 8% of funding comes from that sector. Currently people pay a levy of 7.6 cents per $100 of a property’s insured value and this is capped at $100,000 = total levy up to $76 per year. Suggestions have been mooted with the idea of reducing the levy but increasing the cap – 4.6 cents per $100 capped at $250,000 = total levy up to $115 per year.

There is also those who do not insure against fire but still expect assistance from the fire service – between 5-10% of householders contributed no money to the Fire Service. Free-Riders!

Monopolies and Market failure – ppt download

Here is a powerpoint presentation on market failure. It includes:
– Reasons for failure
– Monopolies
– Deadweight Loss
– Policies to correct
– Effectiveness of policies

It also goes through some essays questions with suggested answers in the AS CIE Economics Paper 2 – essay and data response. Click Market Failure Keynote to download.