Nora Commentary 2 Final

Ski property faces meltdown as global warming chills the market

The property market in ski resorts is at risk of disappearing. Caused by recession, the weak pound, and climate change, Britons’ demand for ski property has decreased, property selling for 30% less than in 2007. Demand has remained strong in high-altitude ski resorts with guaranteed snow. Climate change decreases yearly snowfall, causing a gradual decrease in demand for European ski property.

 

A market has failed when it results in an over or under allocation of resources towards a particular product. Demerit goods are products which are over-provided by the free market and cause negative externalities of production or consumption. The polluting industries cause negative externalities (carbon emitted during the production of demerit goods). The negative externality (global warming) occurs when production creates external costs damaging to third parties. The external cost is added to the private costs of the producer, reflecting the full cost to society. The decrease in the value of ski properties is an external cost of the fossil fuel burning industries. For factories emitting carbon, there is a cost to society that is greater than the costs of production paid by the firm.

The marginal social cost (MSC) is greater than the marginal private cost (MPC) because of the extra costs to society caused by pollution. The article describes the extra costs, the vanishing of a whole market. The graph represents the carbon emitting firms who are only concerned with their private costs and produce at Q_e instead of at the socially optimal level of output (Q_so).  The socially optimal point (MSC = MSB) is not reached. Resources are over-allocated towards the polluting industry. The turquoise shaded area represents the dead weight loss to society, part of which is the fall of ski property value. 

In free markets, the profit-maximizing firms continues producing at Q_e . If the government is concerned with reducing the external costs of fossil fuel production, it can impose regulations on industries like taxing pollution. However, if taxes are too high, it will cause an under-allocation, if taxes are too low, the problem is not fixed. As opposed to this interventionist solution, carbon emission permits are a market based solution to over-pollution. Firms producing less carbon sell the superfluous permits for profit (creates incentives to pollute less). The diagram illustrates the carbon permit market. The demand curve represents the total demand for carbon permits. If an industry demands more carbon permits (wanting to emit more carbon), then the total demand for permits rises and the price of permits increases. Firms who pollute more face higher costs and therefore must charge higher prices for their goods, while firms who pollute less face lower costs and can sell their products for lower prices. Dirty firms will be competed out of the market; clean firms will be more successful and be rewarded by the market for their clean methods of production.

 

The main problem is that “Britons who own flats and chalets at ski resorts could face a threat to their investments – thanks to a long-term shortage of snow”. The ski property industry could save their business through innovation of the quality of their product. Buyers are “only considering resorts at high altitudes with large ski areas – more than 150km of runs – and summer activities”. Chalet sellers and renters could distance themselves from being fully dependent on the level of snow, making them dependent on the polluting industry, as they suffer from that industry’s spill-over costs (climate change). By offering year-round activities, “ski” property buyers will even be attracted to areas where snow is lacking.

By offering activities such as mountain biking, hiking, and horse riding, consumers will be willing to pay more for each quantity available of ski property (demand curve shifts to the right, causing P₁ to P₂, and Q₁ to Q₂). The decrease in demand caused by global warming is balanced by the increase in demand due to innovation of the product.

 

The ski property market cannot control the polluting industries, leaving the government responsible for the regulation. By differentiating, their products demand can be increased to an extent that revenue will increase, eliminating the decrease in value of ski property. Eventually, the government will have to take action, in the form of permits or legislations, to fix a market failure, which will influence all of society’s markets.