School Code

002189

Name of School
Global Jaya International School

Candidate Name

Keshia Saradima Indriadi

Candidate Number

Title of the article

Time China got serious on

pollution

Source of the article

The Financial Times

Date the article was published

March 3, 2014

Date the commentary was

written

March 28, 2014

Word count

748 words

Section of the syllabus the

article relates to

Section 1: Microeconomics

The Financial Times

March 3, 2014 6:11 pm

Time China got serious on

pollution
Beijing must tackle dirty rats as well as
corrupt tigers and flies

he great thing about air pollution is that you can see it.

After years of ignoring the thickening smog around them or

dismissing it as an inevitable consequence of rapid growth
more and more Chinese are clearly worried. Last years
airpocalypse was a turning point. PM2.5 fine particulates
reached levels 70 times those considered safe in the west.
Dangerously high levels of smog returned last month. In
recent years there have been public protests against chemical
factories and toxic waste spills throughout China. Even parts
of the state media have taken to reprimanding local officials
for failing to meet their own clean-up targets.
There are tentative signs too that President Xi Jinpings
administration is more serious about the problem. It appears
to have concluded that pollution is a potential cause of mass
discontent. Decreasing pollution also fits with its policy of
improving the quality of growth by rebalancing the economy
towards consumption. Mr Xi has let it be known that local
officials will from now on be judged not purely by economic
growth but also by improvements to the environment. If this is
implemented, it marks progress. The government is also
demanding real-time data from 15,000 heavily polluting
factories. In his first year in office, Mr Xi has consolidated
power and driven through an anti-corruption campaign with
great ruthlessness. He could plausibly do the same against
pollution. Yet there are serious limits to what can be achieved.
First, the use of coal, the biggest cause of bad air quality, will
almost certainly increase, not diminish. True, China is
planning 28 nuclear power stations to add to the 20 already in
operation. Moreover, it intends to step up use of gas and
2

hydroelectric power, itself not exactly environmentally costfree. Even so, Chinas main coal body is projecting a near-40
per cent jump in use by 2020.
Second, China may merely displace pollution, not tackle it
(just as the developed world has outsourced much of its
pollution to China). The government has called for polluters to
move to the west of the country, hardly a sustainable solution.
Much of the air pollution that drifts across Beijing comes from
Hebei province, which has now started to close outmoded steel
mills. The result is far worse pollution in Shanghai as mills in
nearby Jiangsu province take up the slack. Third, smog is only
the most visible environmental catastrophe. Soil pollution may
be worse still and more intractable. Many rivers are
ecological disasters. Biodiversity has already fallen, probably
never to recover.
China has long talked about cleaning up the environment. If it
is now serious, there are some things it can do. Top of the list
comes enforcement of existing rules. If Mr Xi can clamp down
on corrupt tigers and flies, he can surely do the same with
dirty rats. As well as making it illegal to pollute, he can also
make it more expensive. A carbon tax would be a bold move,
one even western governments have struggled to implement.
Here Chinas centralised, command economy could be an
advantage. In the long run, success will depend on Chinas
ability to improve the efficiency of its economic model.
Improvements so far have been easily outpaced by an
economy that has doubled in size every seven years. China
needs rapidly to learn how to create more output from fewer
inputs. Energy saving should become a priority.
Of course, there is likely to be a cost. It is hard to see how
China can clean up its environment without significant
disruption to employment in polluting industries. The danger
is that the leadership of the Communist party will conclude
that it needs fast growth more than it needs clean air, clean
soil and clean rivers. That would be a mistake.

Commentary
Chinas overabundance of chemical factories and toxic waste
spills has caused much harmful smog that poisons the air in major
cities and endanger the health of their citizens. Fortunately,
President Xi Jingping has recognized the severity of the issue and
will start implementing several market and government based
solutions soon.

Pollution is a negative externality, as illustrated by Figure 1,

where the price of the firms factory productions is less than the cost
it imposes on wider society. The factories would have their own
private costs in order to produce their goods, but they are also
costing society more, as the coal they burn is harmful to the
environment and this is an external cost or negative externality 1.

1 Blink, Jocelyn, and Ian Dorton. Economics Course Companion.

4

Figure 1: Negative Externalities of Chemical Factory

Production

China has got a major market failure situation as resources are

being inefficiently allocated to harmful outputs and as a result
community surplus is not maximized. There is a large amount of
welfare loss in China (illustrated by the shaded triangle), which is a
situation where MSB is not equal to MSC and society does not
achieve maximum utility2. Factory goods are being overproduced
since quantity should be optimum at Q* but it is at Q1 instead, and
22 "Welfare loss (Meaning of)." Encyclo - Online Encyclopedia.
5

therefore price should also be higher at P* if the firms were to

properly internalize the costs of their negative externalities into
their private costs.

One method suggested by the article that can reduce pollution

by internalizing external costs into firms is through a carbon tax,
which is a tax on businesses that produce carbon dioxide through
their operations that is used to reduce greenhouse gases 3. In Figure
2, the marginal external cost is the difference between the MSC and
MPC and would be the amount taxed on firms, an amount that is
proportional to how much carbon they emit. The welfare loss
triangle should get smaller and smaller as firms start to internalize
their cost due to the tax and MSC will become MPC + Tax. Price will
increase and so demand decreases as well, letting the price and
quantity reach socially optimum levels (at P* and Q*) and correcting
the previous market failure.

33"Carbon Dioxide Tax." Investopedia.

6

Figure 2: The Effect of Carbon Tax on the Market of

Chemical Goods

Though the article mentions that carbon tax has been difficult
to implement in Western nations, this is where Chinas centralized
command economy (i.e. all economic decisions are made by the
government4) can be an advantage; so they have greater control
over companies and can impose taxes more firmly. Nevertheless, it
4 Blink, Jocelyn, and Ian Dorton. Economics Course Companion.
7

is difficult to accurately measure carbon tax and though the

government is demanding real-time data from 15,000 heavily
polluting factories" this can prove to be a burden on the government
instead. Taxes work well for the long-term though as they provide
incentives, because when firms increase their prices, demand would
decrease

and

environmentally

consumers
damaging

would

be

less

inclined

products, though this

also

to

buy

has

drawback as it only applies to goods that are price elastic.

Another solution proposed by the article is to move polluters

to the west of the country where pollution is less, though this is
hardly a sustainable solution and would only work short-term. China
is also planning 28 more nuclear power stations and increase use of
gas and hydroelectric power, which could defer them from the more
harmful coal as a source of energy but can still give rise to negative
externalities nonetheless. The increased use of environmentally
friendly technology would benefit society and especially in the longterm as it is a sustainable method but then again it isnt
environmentally cost free and expensive for the government to
implement. However, China also has a large and still rapidly growing
population to worry about and cutting back factory productions with
taxes would likely cause unemployment as well.

China needs rapidly to learn how to create more output from fewer
input (i.e. increase efficiency), as the article says, is the gist of the

solutions that can be implemented by the Chinese government to

correct the situation pollution has caused. Incentives are the key to
long-term solutions for pollution, so perhaps the best solution is to
implement carbon tax, which while a bold move can be done
correctly with monitoring from the government. It would help also if
China can invest in environmentally friendly means of production,
such as hydroelectric or biogas, which could prove extremely
beneficial in the future.
Word Count: 748 words
Works Cited

Blink, Jocelyn, and Ian Dorton. Economics Course Companion.

Second Edition ed. Oxford: Oxford University Press, 2011.

Print.
"Carbon Dioxide Tax." Investopedia. Investopedia US, n.d.
Web. 12 Mar. 2014.
<http://www.investopedia.com/terms/c/carbon-dioxide-

tax.asp>.
"Welfare loss (Meaning of)." Encyclo - Online Encyclopedia.
Encyclo

MMXII,

n.d.

Web.

12

Mar.

2014.

<http://www.encyclo.co.uk/define/Welfare%20loss>.