Market Failure with Haze

Market Failure with Haze

Market Failure with Haze | Negative Externality

The recent haze is a very clear application of market failure and negative externality of production in Indonesia – slash and burn farming techniques.


What is slash and burn farming techniques? For rural farmer with limited access to latest farming technologies and techniques, the fastest way to “refertilize” a plot of land is to set fire and burn it.
While the Indonesians farmers are slashing and burning, they do not take into the external cost created – environmental cost such haze and smog which is harmful to other human beings. At such, there is over production of environmental waste.


To curb this market failure issue, the Indonesian government could impose a lump sum tax on the farmers to force them to “internalize” the external cost of buring or punish them. However, it is not so straightforward due to lax burning laws and complexitiy of tax structure in Indonesia. Worst still, the huge geographical location in Indonesian makes it even harder for policy makers to implement laws or monitor burning.


The only way out seems to be educating the rural farmers (mostly uneducated) on the external environmental cost they create and provide skill upgrades for these farmers to produce using cleaner methods.


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