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Market failure is a situation in which the allocation of goods and services by a free market is not efficient, often leading to a net social welfare loss (Ryans, 2015). Market failure problems revolve around, and/or are reflected in, risk and uncertainty, imperfect and asymmetric information, incompletely specified property rights, collective or public goods, externalities, economies of scale and monopolies, all of which influence the functioning of the market as a means for allocation of resources (Brown, 2013). An example of a market that failed is the sugar cane farming industry. Only in recent times has it been discovered the impact that sugar cane farming is having on the quality of water in the Great Barrier Reef (WWF, 2015). The purpose of this report is to analyze key examples and patterns to clarify the reason for market failure and the impacts of the effective utilization of assets. Two proposed methodologies to review the issue will be assessed utilizing criteria.
Analysis of Key Patterns and Trends
Causes
The primary cause of market failure in sugar cane farming is related to the existence of production externalities associated with land use and the costs to the business. For farmers to work at technical efficiency, fertilizer is used in order to grow the best crops possible, thus making maximal profit. However, this causes indirect externalities towards the environment. The Great Barrier Reef has lost half its coral cover since 1985 (WWF, 2015). Some of the biggest contributors to this problem is sugar cane farming and climate change (Lenny, 2018). Fertilizers are the primary source of nutrients that are leaching and entering the reef, as well as sediments and pesticides (Smith, 2018). Nitrogen that is present from fertilizer run-off poses a major environmental hazard to the Great Barrier Reef (Ryans, 2018). Nitrogen that is not taken up by sugar crops has a high potential of running off into waterways and being carried out to the reef (Morgan, 2017). The excess nitrogen that runs into these waterways causes algal blooms, feeding young crown of thorns starfish, which multiply to plague proportions (Smith, 2015). Algal bloom is a rapid increase or accumulation in the population of algae in freshwater or marine water systems (Government of Western Australia, 2017). The crown-of-thorns starfish is responsible for almost 40% of all coral loss in the Reef (Davis, 2018).
The deterioration in detrimental plant nutrients such as organic matter over time in soils below sugar cane cultivation shows that the existing management system is unmaintainable (Rose, 2018). The death of organic matter in sugar cane fields is predominantly due to the burning of the cane fields prior to and after harvesting (Fox, 2019). Sugar cane cultivation is resource and cost intensive, leading to various social costs (Miller, 2015). When soil becomes infertile for other crops, there is a reduction in the amount of food that can be produced and there is a lack of efficiency to the use of the land (Green, 2018). Also, due to the realization that sugar cane farming is having a multitude of impacts on the environment, less and less people are consuming it, and switching to alternative options such as coconut sugar (Rogers, 2014). Therefore, sugar cane farming and farmers are currently incurring a loss and is not working at the social optimum (Finchy, 2015). Due to demand being reduced the livelihood of the sugar cane farmers is impacted, leading to reduced income (Patterson, 2015).
Effects
The sugar cane market failure has an amplitude of effects, from damaging the Great Barrier Reef to having a major impact on tourism. These two issues are having major influences on Australia and its development and growth economically (Sugar Cane Project, 2015).
The high level of nutrients upsurges the algae growth and can alter the biodiversity that is found along inshore reefs. Not only this, but biodiversity is being killed due to the algae bloom and it is predicted that by 2050, there will be minimal to no biodiversity left in the Great Barrier Reef (Hughes, 2007). Another key factor that contributes to the damage done to the Great Barrier Reef is nitrogen that is leaked into the Reef due to sugar cane farming (Dier, 2015). When the conditions are correct the crown-of-thorns starfish multiplies, and the starfish can grasp plague proportions, devastating for the hard-coral population (Patterson, 2018). Furthermore, the pesticide run-off from sugar cane farming is another major concern due to their impact on various marine plant species such as corals and macro algae (Whetton, 2017). Sugar cane farming is seen as being the leading contributor to sedimentation leaking into the Great Barrier Reef waterways at 78.2%, which is a drastic difference compared to the other types of cultivation. This sedimentation run-off not only effects the water quality in the Great Barrier Reef, but also it destroys the habitat in which the biodiversity lives in (Feely, 2018). Furthermore, it reduces the light obtainable to seagrass ecosystems and inshore coral reefs, tarnishing coral settlement, reproduction and maturity (Graham, 2016). Another example of sugar cane farming being a leading contributor in the destruction of the Great Barrier Reef is that sugar cane farming is the predominant cultivation in the nitrogen run-off at 86.4%. This figure in relation to the other types of farming is a massive number. Clearly, sugar cane farming is having major impacts to the biodiversity in the Great Barrier Reef and the problem must be addressed in order to find adequate solutions.
Tourism within the Great Barrier Reef is decreasing at a steady rate due to various reasons. These reasons are primarily concerns around environmental degradation, climate change and farming practices. Overall, the total number of tourists over the day and night since 2007 has been relatively unchanged, with the total number of visitors growing by only 4% to 42.8 million over the five years (Russell, 2011). This figure proves that the tourism numbers to the Great Barrier Reef is not increasing at a rate to sustain tourism. The damage done to the Great Barrier Reef from sugar cane farming could affect tourist numbers in the ever near future. The Great Barrier Reef could see the number of visitors reduced from 2.8 million to around 1.7 million per year (Smith, 2012). This is equal to more than 1 billion dollars in tourism expenditure lost, posing a threat to around 10,000 tourism jobs in regional Queensland.
Application of Economic Models
There is a decrease in demand from D1 to D2, ultimately leading to a new market equilibrium. The reason for the decrease in demand is due to the investigations being done into sugar cane farming which proves that it is causing environmental damage to the Great Barrier Reef. Thus, consumers are switching to complementary goods such as coconut sugar and Birch sugar. Due to the decrease in demand, there is forecast to be a decrease in supply and a decrease in profit. This will affect the livelihood of the sugar cane farmers as their sustainable income is falling due to the decrease in demand. The implications that sugar cane farming is having on the Great Barrier Reef is an issue that required immediate attention and government support is also required. Thus, solutions to the effect of sugar cane farming on the Great Barrier Reef must be explored.
Evaluation of a Current Strategy to Redress the Problem
In order to redress the market failure created by sugar cane farming, the strategy of using new nutrients and pesticide management practices will be evaluated (Howard, 2016). This strategy will be evaluated using the criteria of efficiency, impact on effectiveness and the impact of dynamic efficiency.
Impact on Efficiency
Sugar cane farming is evolving every year, one of the main focuses being on how to use pesticides and other herbicides more efficiently. There are various strategies that are currently in play to try and improve the effectiveness of sugar cane farming. This is demonstrated by one of the leading drivers for change in sugar cane farming, David Ellwood. He has been involved in a trial where he uses verified electromagnetic (EM) mapping of his sugar cane block paired with yield maps to classify areas that can be managed differently (Rowle, 2018). Electromagnetic mapping is a piece of technology that sends signals into the soil and measures the quality of the soil and how well it has been maintained (Agex, 2018). In areas with subordinate soil the sugar cane yield is low, therefore a lesser nitrogen amount can be applied, as the cane is unable to take up a higher rate (Selva, 2015). Less nitrogen that is used reduces the risk of run off into the Great Barrier Reef, thus preserving it. Where there is good soil there is naturally higher yield; in these areas a higher nitrogen rate can be applied, as the larger crop will use the full application. This has the possibility to limit nitrogen losses, improve efficiency and producing higher yields. Furthermore, Sugar Research Australia (SRA) has innovated a new tool for growers to assist in choosing the right fertilizer blend that is equivalent to the nutritional requirements of growers paddocks (Sugar Research, 2019). Although both these strategies will mitigate the lack of efficiency, it takes years before every farm is analyzed to become efficient, therefore short-term solutions will have to be introduced. Furthermore, the price of introducing these longer-term solutions costs the government millions. However, the positives outweigh the negatives because in the long run the solutions will provide far greater benefits towards the Great Barrier Reef. Therefore, the current solution in mitigating the damage done to the Great Barrier Reef and the efficiency in how it is done is positive.
Impact on Dynamic Efficiency
There are various improvements and advancements to technology in order to reduce the impact that sugar cane farming is having on the environment. A major example of this is the development of patented ultracompact hyperspectral imaging cameras (Gamaya, 2016). This advancement in technology has the ability to give access to a wealth of information. It can check whether the soil and pesticides being used are harming the environment. The camera processes the raw data into machine learning and AI, where it is then graphed, and information is fed back (Shirley, 2018). Furthermore, Project Catalyst is a project where growers share innovation and ideas with the other growers to help reduce the fertilizer run off into the Great Barrier Reef. Another technology advancement is the low-cost drip irrigation (Department of Agriculture, 2016). In this case study, it was revealed that there was lower growing costs and reduced water use and run off (Thompson 2015). Furthermore, vegetated strips are an area of vegetation next to a water way, designed to remove pollutants and sediments from run off through water (Small Farm, 2018). Many of the farmers are now using these vegetated strips to prevent the run-off and alleviate the damage done to the Great Barrier Reef. Although these innovations in technology provide a direct benefit in the short run, the cost of producing the equipment can cost the government millions of dollars. However, I still believe that the positives that the technology contributes to the society outweighs the negatives of the expenditure.
Externalities of the Solution
There are both negative and positive externalities related to the solution to sugar cane farming and its environmental impact. The negative externalities of the solution are that it costs the government millions of dollars to subsidize the solutions. Furthermore, the solution has a negative externality on the producers in the short run as they would have to change crop layout, which would be very costly. However, there are certain positive externalities associated with the innovation of technology. These include a positive externality toward the consumption of sugar as the land will be better maintained and cared for and increasing and producing better yield. Furthermore, when consumers consume sugar, they can now be reassured that they are not contributing to the damage of the Great Barrier Reef. This further has a positive externality on the producer as they will be able to make larger profits due to the increase in demand and consumers buying the product.
Conclusion
Undoubtedly, sugar cane farming is having a major impact on the Great Barrier Reef and the environment. The agricultural products being used for farming are causing bleaching in the Reef, leading to the death of it. This effects the biodiversity that is present in the Great Barrier Reef as well as impacting the tourism industry. Furthermore, sugar cane farming has a major cost impost to business. The current solutions however are more positive and is bringing positive change towards sugar cane farming and the industry. Although there are some slight negatives to the solution, ultimately it can be overcome with good policies and practices. Sugar cane farming is not the only type of farming that is causing environmental damage, there are other farming techniques that are as well. In order for the current generation to have a future, something needs to change. These changes can be made by people and governments and industry.
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