Wednesday, September 5, 2012

The Asbestos Problem

This was an assignment for my economics course

Asbestos is a mineral fiber that has many wonderful properties— it's fire-resistant, flexible, and a good thermal and acoustic insulator. With these useful qualities, it became extremely popular in the early 1900's, when people used it for a variety of things, such as wall insulation, roofing tar, and fire blankets.

Unfortunately, as wonderful as asbestos may seem, it is responsible for a multitude of diseases: it has been proven that exposure to airborne asbestos can cause lung cancer and mesothelioma (a cancer of the pleura of the lung), as well as asbestosis and diffuse pleural thickening. Cancer is almost always fatal, and the other two conditions result in the difficulty in breathing— which, if not fatal, severely affects the quality of life.
Due to the health concerns, more than forty countries have completely banned the use of asbestos. And while Canada has not banned the sales of all asbestos products, it has set strict regulations to ensure that the use of asbestos-containing products would not pose any safety threats to the users.

Even though Canada has restricted the sales of many asbestos products within the country, it has continued to mine and export its asbestos to developing nations. According to a 2008 statistic, 96% of Canada’s production of asbestos is exported. This has raised many criticisms (e.g., from David Suzuki), for many believe that the exports of asbestos are simply unethical.

So now, an important question arises: Should Canada be allowed to mine, market, and sell asbestos?

Well, before tackling this question, I will first analyze the market failure— which is when the market is not pareto efficient— of asbestos. Particularly, I will be looking at the externalities of asbestos.

A common source of market failure is externalities, which is when the transaction between two parties results in some third-party costs (negative externalities) or benefits (positive externalities) that are not reflected in the price.
Evidently, the asbestos market does not generate any positive externalities; the use of asbestos does not make any bystander better off.

On the other hand, it is quite clear that asbestos generates quite a lot external costs. When Canada supplies asbestos for a developing country like India, the asbestos is usually unsafely used as roofing material. This means that the asbestos fibers that are on the buildings could easily get released into the air, and could potentially cause health problems for everyone who lives nearby. In other words, the consumption of asbestos generates quite a lot of negative externalities.

The production of asbestos generates a lot of negative externalities too, as it is extremely harmful to the workers’ health. In fact, according to statistics gathered by Quebec's workers compensation board, “exposure to asbestos is the No. 1 cause of workplace-related deaths for Quebec workers and amounts to about 60 per cent of all such fatalities in 2009.” There is no way to argue against such gruesome statistics.

In addition, the mining of asbsestos is very harmful to the environment, as it destroys the surrounding landscape and the entire ecosystem in the mining area.

So in short, asbestos generates a large amount of negative externalities, in both its production and consumption.

Market Failure
Whenever there are negative externalities, it means that the good is overproduced. This is due to the fact that the external costs are not internalized, which causes the marginal social cost (MSC) to be higher than the marginal social benefit (MSB) at the market equilibrium. This thus makes the equilibrium quantity higher than the socially optimal quantity (where MSC=MSB):
If the last few lines are a bit too abstract, I will put it in a more understandable way: at the current level of output, the social costs include the monetary costs of production, as well as environmental costs, healthcare costs, and the cost of 100, 000 lives per year. This for sure offsets the benefits of "cheap" and powerful building material, and it means that the current level of output is definitely too much.

Now the question is: what exactly is the socially optimal quantity of asbestos? Is it 80% of the current quantity? 50% of the current quantity? Or could it be 0%?

Well, no one knows, as it depends on what how much we value our environment and the health of the people who are exposed to asbestos. It is impossible to put a dollar cost on these kinds of things, and therefore impossible to calculate an objective number.

But there is something that we do know: if asbestos can be produced and consumed safely at a reasonable cost, then clearly the socially optimal level wouldn't be zero. The social cost at any quantity will drop by a very large amount, making it better for the society to have some asbestos produced and consumed.
Now, let's go back to the original question: should Canada be allowed to mine, market, and sell asbestos?
My answer is: yes, as long as Canada can ensure that asbestos is produced and consumed reasonably safely.

If Canada wants to export asbestos, the Canadian government should...
1. Set and enforce better workplace regulations for the miners, so that they don't get exposed to asbestos.
2. Export its asbestos to a country only if it is confident that the country can safely use the asbestos (perhaps when the country has set better regulations).
3. Tax the mining companies for their production of asbestos. This would internalize the externalities (the environmental costs and the remaining health risk) and make the marginal private cost closer to the marginal social cost.
4. Encourage other exporting countries to do the same. Obviously, Canada is not the only exporter of asbestos, and if Canada is the only exporter adopting the above measures, the measures are not going to be effective.

Is it possible?
Realistically, though, it would seem more practical for Canada to just stop the asbestos exports. The measures to reduce market failure are extremely hard to enforce, especially the ones that require other countries to cooperate. And if they could be enforced, they are probably going to be quite costly.

Now, are Canada's asbestos exports worth such a large amount of effort and costs? Clearly not. According to data from 2011, Quebec's asbestos exports (the only Canadian exports of asbestos) in 2010 were valued at $76.5 million, which was about 0.13% of Quebec's total exports. This obviously was not very significant to Quebec's economy, let alone Canada's.

Also, both of the only two asbestos mines in Quebec have halted their productions in November 2011. One has since declared bankrupt and the other still needs refinancing. This adds a further disincentive for the Canadian government to try to support the industry. Would the government really want to loan money to an industry that isn't even that profitable?

In addition, Canada's international image has been damaged by the asbestos exports. By stopping the asbestos exports, Canada could improve its image and end the scrutiny from other nations.

Canada should be allowed to export asbestos if it can ensure the safety of the substance, because then it would be removing the negative externalities of the product. However, it is simply too costly to do so, and Canada would be far better off abandoning the asbestos industry.