Practise judging when governments intervene in markets, using diagrams, data and examples to compare benefits, costs and welfare effects.
Sources for use with Section C
Cotton and clothing
Figure 1 World price of cotton, $ per lb, April 2020 to January 2021
Extract A World cotton price rises
Between 1 April 2020 and 1 January 2021 the demand for face masks, bedsheets and surgical gowns increased. All require cotton in their production. During the same period there was a reduced cotton crop in Pakistan, the world’s fourth largest supplier. High temperatures resulted in a decrease in the amount of cotton produced. Both these factors caused an increase in the price of cotton.
Extract B Clothing manufacturers should reduce environmental costs
Clothing retailers and manufacturers earn $2.4 billion globally and directly employ 75 million people. The clothing industry is the world’s third largest manufacturing sector.
The manufacture of clothing involves significant environmental costs. For example, on average, producing one pair of jeans requires 3 781 litres of water and creates 33.4 kg of carbon emissions. This includes the production of the cotton through to the delivery of the final product to stores.
According to the United Nations, each year clothing manufacturers use 93 billion cubic metres of water; 20% of all wastewater comes from clothes dyeing by manufacturers; after use, 87% of clothing is burnt or disposed of in landfill; and clothing manufacturers produce 10% of annual global carbon emissions. This is more than all international flights and shipping combined.
Clothing retailers used to have four seasonal clothing ranges per year. However, many clothing stores now offer new ranges weekly. Between 2000 and 2020 the number of clothing items produced yearly increased from 50 billion to 100 billion. In 2019 a person bought, on average, 60% more clothing than in 2000 and more items of clothing are thrown away. Less than 1% of used clothing is recycled into new garments.
In response to the environmental damage caused by the clothing industry, Ireland’s Government is considering the introduction of an indirect tax on clothing.
Extract C Indian Government to remove clothing subsidy
India employs 35 million workers in clothing manufacturing. Clothing accounts for 12% of India’s exports. To protect this important industry the Indian Government used to pay a subsidy to clothing manufacturers. However, the US Government and the Turkish Government argued that this gave Indian manufacturers an unfair advantage. Consequently the Indian Government removed this subsidy in 2018.
Define the term 'indirect tax' (Extract B, line 20).
Which one of the following is an example of government failure?
Government intervention leads to a net welfare gain
A new environmental regulation leads to excessive administrative costs
Speculators cause a market bubble to emerge in the housing market
Free riders lead to the underprovision of public goods
Which one of the following is an example of government failure?
Market forces eliminating excess supply of a product by enabling its price to fall
A market bubble emerging in the value of shares on the stock exchange
The introduction of a tax that causes a decrease in external costs
The introduction of a tax that causes an increase in smuggling