Market Failure and Policy Instruments: Climate Change

This paper aims at discussing CO₂ emissions as the result of market failure and some alternatives to deal with it. In details, I firstly demonstrate why climate change is caused by market failure through greenhouse gasses emissions (GHG) and CO₂ emissions. Secondly I outline and briefly mention several policy instruments available to deal with such problems. Thirdly and lastly, I discussed each instrument’s advantages and disadvantages.

The market usually does not function very well when it comes to public good as the public good has no price in it. Price can be assigned when there is property rights attached to the goods. That is exactly what is happening with public good, it lacks of property rights or is having ill-defined property rights. Imposing property rights means that we give the right to utilize the goods to some one/entities/clubs. Meanwhile, the characteristics of public good are non-excludability and non-rivalry. Non excludability means that it is impossible to exclude some one from utilizing the good. Non-rivalry means that the consumption of the good by an individual does not reduce the available amount for others to consume.

Carbon dioxide (CO₂) and other GHG are emitted to the earth atmosphere. Meanwhile, the atmosphere itself is a public good. It is non-excludable as everyone in the earth can emit anything to it or breathe the air from the atmosphere. It is non-rivalry since my emission does not reduce others’ rights to emit. It does not have price and thus no available market mechanism. In the end, when everyone emits GHG and CO₂ to the atmosphere, then there will be excessive stock pollutions in the atmosphere. Moreover, it is subsequently causing climate change.

However, as the awareness of the danger of climate change arise, countries started to seek out solutions to this problem. The climate change is a complex problem since it is a transboundary problem –i.e. climate change happens in everywhere and is caused in every place- and the existence of spill over –i.e the abatement of one country is enjoyed by other countries, so does the pollution of one country is affecting other countries too-.

There are several policy instruments available that can be used to mitigate the climate change problem. The policy instruments are grouped into three categories that are institutional approaches such as voluntary bargaining, command and control such as emission regulation, and economic incentive instruments such as taxes, subsidies, and tradable emission permits. The underline idea in economic incentive instrument is to give price to the emission so that profit-maximizing firm will also taking into account the opportunity cost of emission into their production plan.[1]

A profit-maximizing firm produces goods at optimal output level of maximal profit. Profit is maximal when marginal costs of firm equals to marginal benefits of firm (MC = MB). However when firm pollutes and the pollution is not priced, it creates social costs/damages to the society. The damages are called externality and are often not calculated in product price. By giving price to the damages –either through subsidies, taxes, or emission trades- the pollution then influences the cost function of the firm. Thus the firm internalizes the externalities.

Environmental taxes or known as Pigouvian Taxes is a practice of assigning taxes to pollution emitted by firms. Taxes are assigned to pollution as it will be less efficient if assigned to inputs or final products.[2] Pollutions are to some extent allowed as in an economic point of view, it is never about achieving zero pollution, and instead it is about balancing the benefits and costs. There are three steps to find the balance between benefits and costs –i.e. the optimal pollution level- that is identifying firm/industry profit function, the social damages function –that is the externality effects-, and the optimal pollution level.

The optimal pollution level is the point where the shadow price of social benefit is equal to the shadow price of cost. The shadow price of social benefit is the reduction in social damages due to a reduction in product produced, while the shadow price of cost is the loss of firm profits due to a reduction of a unit produced. In order to find the shadow price, we should calculate the marginal function –i.e. the first derivative- of firm’s profit function and social damages function. The next step is to equalize the marginal social benefit and marginal abatement costs. Environmental taxes then are applied to this level.

Subsidies work similarly to environmental taxes as at the optimal pollution level both mechanism –the environmental taxes and subsidies- are levied or paid at the same rate.[3] However, as Perman (2003) noted “the two instruments are different in their effects on income distribution”. Taxes caused firms to lose income while subsidies caused firms to gain income. In the short-run and at the optimal pollution level both mechanisms are similar; nevertheless, as subsidies are given in form of lump-sum payment, subsidies may give different long-term effects.[4]

Another mechanism of economic incentive mechanism is marketable emission permit. The idea is that government set an overall industry emission level and let the firms distribute the emission level independent of government intervention. In general, the mechanism works as follow: first, the government set a targeted industry emission level; second, an initial emission permit is distributed to each firm; third, firms sell/buy permit to another firms. This mechanism is also known as the cap-and-trade mechanism. Firms are able to sell or buy permit as they are different in their profit function. A firm may find it more profitable to emit more while other firms may find it more profitable to emit less and sell the excess allowances. Thus, an increase in one firm is compensated by decrease in other firm/s. Tradability is an important characteristic of marketable emission permit that grouped it into economic incentive instruments, otherwise it will be categorized as a command and control instruments.

There are several indicators to compare between above mentioned mechanism that is cost-efficiency and monitoring-administering-and-enforcing-compliance costs, long run effects, double dividend, and equity/distribution. It is obvious that command and control instruments are least cost-efficient compare to economic incentive instruments as compliance costs are usually high. European union emission trading for example estimates that the cost of emission trading is between 2.9 billion euros and 3.7 billion euros compare to 6.8 billion euros compliance costs annually.[5] Among economic incentive instruments, emission trading is the most cost-efficient compare to other instruments.[6] However, command and control may create greater long-run effects in term of technology advancement compare to other instruments as it provides incentive and guidance for technology research. I think that emission trading will give the biggest “double dividend” as it creates a lot of job opportunity. As of distribution issue, taxes may cause bigger effect for consumer –i.e. consumers bear the cost- regardless of polluter pays principle especially when market is of monopoly or oligopoly market.

Furthermore, in the presence of corruption, I think the emission trading will give best results compare to other instruments. The reason is that emission trading will minimize the involvement of civil servant in its operation and thus minimize the possibility of corruption.

Based on above comparisons, I think the best instrument is the emission trading.

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REFERENCES

European Commision. (2005) EU Action Against Climate Change: EU Emission Trading - an Open Scheme Promoting Global Innovation, Belgium.
Perman, R., Common, M., Mcqilvray, J., Ma, Yue. (2003) Natural Resources and Environmental Economics, 3^rd edition.

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[1] Perman, R., Common, M., Mcqilvray, J., Ma, Yue. (2003) Natural Resources and Environmental Economics, 3^rd edition.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] European Commision. (2005) EU Action Against Climate Change: EU Emission Trading - an Open Scheme Promoting Global Innovation, Belgium.
[6] Perman, et. Al. Ibid.

The Drawbacks of Environmental Taxes

One way to internalize externalities is by introducing environmentally related taxes. It is also effective and efficient instruments for environmental policy.[1] However, I think that this idea is not suitable –or have to be prepared more carefully– in the developing countries and less developed countries –in this paper, I use Indonesia as an example- where corruption is innate. I firstly discussed briefly the problems of tax collection and of tax-generated revenue usage in the context of third world countries. Secondly, I argue that tax may further increase environmental damage through increase in natural resources extraction. Thirdly, the problem of marginalized people dependency on cheap-yet-environmental-harmful products and services is brought into the paper. Fourthly, I discussed the effect of environmental taxes to the national competitiveness. Lastly, considering those four reasons, I argue that social responsible approach is better than environmental taxes in the third world countries.

Taxes contribute 66.59% of Indonesian’s National Budget income in 2006.[2] Whilst, the not-taxes incomes are earned from natural resources-related income and state-owned enterprises profit. However, despite of tax administration reform started in 2000, the taxes mentioned above are only collected from 1.71% of Indonesian population.[3] It shows how big the scale of tax evasion in Indonesia is. In my opinion, there are two important issues regarding this matter, which is social trust towards tax collectors and the perceived benefit of paying taxes.

First issue, the public trust regarding tax collectors –and to other civil servants- are low. Taxation department is seen as the dent of corruption. Corruption is initiated in two ways that is of tax collectors and of taxpayers. The first way, it is believed by public that tax collectors always calculate higher tax than of taxpayers’ calculation. The main reason of doing so is so that taxpayers choose to bribe tax collectors, instead of going through the time-consuming court settlement of tax dispute. The second way, taxpayers deliberately offer tax collectors some amount of money in exchange for lower tax calculation and thus saving some money. Another “advantage” for taxpayers of doing so is time-saving. Second issue, in Indonesia, paying taxes has long been perceived as not giving direct benefits such as social securities to the taxpayers. To some extent, this perception discouraging taxpayers from paying taxes.

From the point of view of welfare analysis, there is a dead weight loss created from three effects of environmental taxes which are budget gained from additional tax revenue, consumer’s loss as price increased and quantity consumed is decreased, producer’s loss as quantity decreased and the taxes burden (i.e reduced firm’s profit). Yet, there is environmental benefit gained from less environmental damage as quantity is decreased. The net welfare is positive as long as environmental benefit is bigger than dead weight loss, vice versa.

However, taking the corruption into account, I think that a positive net welfare is harder to achieve. My reasoning is that the environmental taxes revenue will not fully receive by state, as it is distorted by corruption, and thus lowering the budget gain. Meanwhile, the producer’s loss and consumer’s loss remain same and thus the dead weight loss is bigger. Therefore, introducing environmental taxes in heavy corruption countries may further harm the net welfare. Furthermore, environmental taxes, in these circumstances, will give incentive to corrupt more and hence increase the rate of corruption.

One of the environmental taxes goals is to conserve environment through reducing consumption and reducing natural resources extraction. The consumption reduction is achieved due to price increase. As consumption is reduced, logically speaking, the production is also reduced and thus the need of raw material is decreased. However, Chichilnisky (1994: 855) argues that “taxes can lead to more extraction of resources, defeating their original purpose”.[4] The logic behind it, first, is as the demand for raw material decreased, the resource’s price is decreased, and thus the extractors’ income is declined too. Second, the extractors –many of them are subsistence workers- will extract more in order to arrive in the same income level. Why is this not happening in developed countries? The reason is that natural resources are capital-intensive goods while they are labour-intensive goods in third world countries.[5] Thus, the environmental taxes can be a backfire to environmental conservation. This is another drawback of tax.

Additional tax means additional cost to consumers. In the marginalized community where income is low, a cost increase is harmful. If the community is dependent on those products and services –signalled by relatively inelastic demand and high consumption rate-, then the harmful effect will be magnified. The government often tries to keep the cheap price as the products and services are of basic needs such as fuel (gasoline, kerosene, and gas), water, electricity, and food. To some extent, price increase can cause social distress and political instability and then it increases social costs. Again, there is possibility that environmental taxes are harmful to the net welfare. Of course, the effect of price increase can be compensated by returning taxes to the community through subsidies. However, we have to bear in mind that different goods have different utility functions. Thus the compensation may not always be able to replace the cost.

Imposing environmental taxes can lowered the national competitiveness especially in the region where there is not standardized environmental policies among countries. Environmental taxes are hurting both the country and the company. It hurts the country as tax decrease the country’s investment attractiveness compare to other countries that are not imposing that tax. It can even –to some extent- induce company relocation. Instead of giving “double dividend”, environmental taxes can lower employment in that country. Environmental taxes hurt the company as it increase product price and make it less competitive in international or regional markets. In my opinion, when this kind of taxes is going to be imposed, then it should be imposed and standardized in the closely related geographical region and trade partners such as in EU and NAFTA agreement.

In summary, I argue that imposing environmental taxes in third world countries such as Indonesia may have drawback that can exceed the benefit of environmental taxes. I give four reasons that is corruption, intensifying natural resources extraction rate, increasing social distress and political instability, and weakening national competitiveness. Considering these drawbacks, I prefer more to the social responsibility approach. First, it minimizes interventions from state and thus reducing the corruption opportunity. Instead of having “double dividend” from increasing employment, the “double dividend” of social responsibility is the decreasing corruption rate. Second, the approach tries to ensure ethical business practices. One of the ethical principles is to pay adequate salary to the workers and to buy accountably extracted raw materials with equitable price. Third, the approach usually caused less cost to the company compare to the cost from complying regulation. It implies that product cost may not increase higher than if it is taxed and thus it does not hurt company’s product competitiveness. In addition, it may open new markets for the social responsible products. Moreover, the approach does not influence national competitiveness as it is usually a voluntary involvement. However, social responsibility approach needs public control and facilitating bargaining from the country.

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[1] OECD. (2006), The Political Economy of Environmentally Related Taxes.

[2] Anggaran Penerimaan dan Belanja Negara & Neraca Keuangan Republik Indonesia 2005-2006 (translation: Indonesian’s National Budget & Fiscal Balance 2005-2006).

[3] Harian Bisnis Indonesia, 10 juta NPWP dikaji Ulang (translation: The number of 10 million taxpayers will be checked again), 16 May 2006.

[4] Chichilnisky, Graciela. (1994), North-South Trade and the Global Environment, The American Economic Review, Vol. 84, No. 4., pp. 851-874.

[5] Chichilnisky, Ibid, p. 854

Water: Public or Private Goods?

Water has long been treated as public goods and has been managed solely by state or state-owned enterprise. At the other hand, nowadays, there is a growing demand to treat water as private goods. Although, according to van der Veeren – and many other eminent figures such as Vandana Shiva – water should remind as public goods[1], in this paper one tries to elaborate the idea of water as private goods. Firstly, one discusses briefly the lack of state-management of public goods. Secondly, one explores the promise – at least at the theory level – of privatization. Thirdly, by bringing the promise to the empirical world, one analyzes the drawbacks of privatization. Lastly, one indicates improvement alternatives of water management policy.

State management through government body or through state-owned enterprise is well-known – at least in the developing and less-developed countries – for its low service quality, inefficiency, corruption, vested political interests, and mismanagement. It is – to some extent – caused by monopoly of service and goods, and public control. As a monopoly, state-owned enterprise does not have to improve its production efficiency in order to survive as in the competitive market. Customer has no choice but to accept the condition of goods and the level of service offered. Customer service is then not a factor to retain customer and thus generating low service quality. Water service – in term of degree of access and product price – is often used in political agenda such as election campaign. Setting product price based on political agenda without considering production cost will further deepened the net loss of water state-owned enterprise. In the end, all of these negative aspects create high transaction cost and therefore burdening the economy and the society.

The idea behind water as private goods is that by privatizing water, it creates a non-monopoly market. Non-monopoly market, theoretically speaking, implies that everyone can get into the market and offer his/her products to buyers. Buyer reacts rationally by selecting the optimal offer, which is the offer that gives him/her the maximal utility. In order to make his/her products competitive, producers will keep on innovating and improving its service and efficiency. By doing so, market’s efficiency is improving and so thus the buyer utility (as they now able to consume higher product quality, higher amount, or even cheaper product price). To some point, the market will reach its Pareto efficiency which is not achievable in the case of state management. It looks like a win-win situation.

However, this is not happening in reality. Instead of providing wider water access and cheaper price, privatization resulting in a higher price and stagnant water access. So why is it happening? Among other reasons, one highlights two subjects which are profit seeking and market entry. Profit seeking means that a firm’s prime goal is to produce profit. Firm’s business continuation is dependent to profit. In previous condition, state-owned enterprise may sell water below its production cost. Thus, when privatization is taken place, product price is corrected (i.e. increased) to its production cost and profit margin. Furthermore, firm may not provide water access to some people as there is not sufficient potential customer in some remote/small area. It seems difficult to enter the market as water processing industry needs high investment and working capital. This, by itself, is limiting the number of firm in the market. The market is now having oligopoly instead of having full-competition market. Although oligopoly is better than monopoly, but it is still not as good as the full-competition market.

Now, how are we going to deal with those problems? One divides it based on actors such as state, society, and company/market. State can play a role as a facilitator through issuing rules and regulations regarding water market. It can require companies to provide a minimum service level in term of water quality, access, water distribution, etc. It also can induce a price ceiling (i.e. maximum product price allowed) for water. In brief, it is state responsibility to ensure a conducive market for improving water services. Subsidies can also serve as one of government tools in providing water access and improving water distribution to the marginalized people. In the other hand, government can give subsidies in different sectors for example education and health (while maintaining high water price). The arrangement then is to ensure that the net benefit of subsidies – in education or health or etc – is greater than the net loss from increasing water price. Thus, it improves the net welfare.

Society plays important role in controlling firm’s practices through public participation. Public participation can varies from submitting service complaint until boycott. The crucial factor here is that society is information-literate (i.e. having enough information). Public can also participate in form of capital/equity (i.e. buying stocks) so that public gains some control over company’s business practice. Another form of public participation is through legalizing the cultural/traditional water management. This traditional arrangement – such as Subak in Bali-Indonesia – has proven to be effective and efficient.[2]

Company should balance its prime goal with other goals. Company practices should be in-line with those of sustainable development. Corporate social responsibility – as one kind of sustainable development approach – deals with balancing company’s economic goal (profit), environment goal, and social goal. This notion seems to be a win-win solution for companies as it still takes profit into account without excluding environment and social problems. There is wariness that once water becomes private goods, it will exclude more negative externalities from its production function (i.e. firm does not internalizing externalities). However, externalities are also been dealt with in corporate social responsibility scheme through increasing/improving environment indicators and social indicators.

In summary, one tries to demonstrate the possibility of transforming water from public goods into private goods. Although empirically water privatization does not meet its promise, yet by making a better preparation (i.e. making a conducive market) the promise may be fulfilled. The preparation can be done by state, society, and company. As long as the company is internalizing externalities – that is correcting the property rights – and state is able to cut the effect of price increase by giving subsidies – that is improving net welfare –, then water privatization would not be of any problem.

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[1] van der Veeren, Rob, lecture in class of Environmental Economics in Practice, 08 November 2006, Wageningen University and Research Centre.

[2] Suarja, I.G. and Thijssen, Rik, Traditional Water Management in Bali, LEISA Magazine, September 2003. Accessed at 13 November 2006, available on-line at:
http://www.leisa.info/index.php?url=show-blob-html.tpl&p%5Bo_id%5D=12689&p%5B

Criticizing the Cost-Benefit Analysis: Strength, Weakness, and Political Interest

The cost-benefit analysis (CBA) in my opinion is a powerful tool in assisting a decision making process. However, it may not be the best tool available in assessing several environmental protection programmes. In this paper, I discussed about the strength and weakness of CBA. There are two strength points of CBA that is it increases efficiency and it provides an objective and transparent decision making process. The weaknesses are the problems of quantification, overstating costs, broadening inequality, and discounting practice. In the end of the paper, I include my reflection on empirical decision making practices in my country –Indonesia- where political interest often neglects the CBA results, and thus I think that in the country such as Indonesia, it is not the question of what is the best strategy for public welfare but which strategy is yielding greatest benefit for power holder (i.e. political party, president, ethnic group, etc).

The cost-benefit analysis follows economic principles that resources are scarce and they should be utilised wisely to increase net welfare. The cost-benefit analysis increases efficiency –at least theoretically- through better allocation of scarce resources –that is mostly concerning public funds- into projects that yield greater benefit among other various project opportunities. How is it happening? The basic idea is to value all projects by the same measurement that is in monetary term. In each project, the CBA quantify and monetize costs and benefits of the project and calculated the net worth / (loss) of the project. The CBA compares every project afterwards. The project that gives greatest net worth is usually selected and financed. By bringing the project’s effects into one measurement, the CBA makes it possible to compare projects social costs and social benefits.

It also provides a theoretically objective comparison among projects as it use the same standards. The CBA also requires analyst to reveal all the assumptions used in the analysis and thus making it a transparent process. As it makes decision making process more objective and transparent, then the CBA improves the accountability of decision making process.

The quantification of costs and benefits besides being CBA’s strength, it also in the same time becomes its’ weakness. In my opinion, there are two issues regarding the quantification problems that are the assumptions used in quantification and the unquantifiable of several benefits and costs.

In quantifying social aspects –no matter as costs or benefits- assumption is used in two ways, which are when we weighted the aspects and when we valued the aspects. The weighing is judged on preferences and these preferences can differ among groups in society, analysts, regions, and time frames. Thus, I think that judging something based on preference is not fully trustable. In valuing the social aspects, analysts may use several ways such as “willingness to pay” (WTP) or “willingness to accept” (WTA). However, I think not every social aspect can be valued correctly for example the life. This brings me to the second issue in quantification that is the unquantifiable of several benefits and costs. It is unquantifiable due to its natures (i.e. uncertainty and lack of information) and ethical considerations.

The second weakness is costs overstatement. It can come from the way the costs are estimated, the size of the projects or action needed, and the cost factors (i.e to include costs that are irrelevant to the project). Empirically, the costs and benefits can be overstated [1]. As it can be overstated, it means that inaccuracies happened and thus CBA’s result should be treated with caution.

Like the neoclassical concern that is optimization, the CBA deals only with optimal allocation of scarce resources, yet it does not taking into account the distribution problems. For example consider two projects that are to provide drinking water to poor people and to clean a park in rich people dwellings; both projects give the same net worth. If government makes decision based only on CBA, then it may select the cleaning project instead of drinking water project. CBA calculates the benefits and costs aggregately, so that it does not matter who bear the costs and who enjoy the benefit. Another example, suppose government has a plan to build a new railway passing through poor neighbourhood where the beneficiaries of the new railway are rich people. It can be that the project creates benefits for the rich at the costs of the poor neighbourhood –such as moving out their house or noise pollution-. Thus, CBA, in this case, is broadening the existing inequality. Meanwhile, any public policy should ideally take equality as an important aspect. The problem also occurs in calculating WTP or WTA as the rich may have higher WTP –they have more money- than of the poor to get rid disadvantaging projects from them.

The last CBA’s weakness that I discussed here is regarding the discounting practice. The idea is developed from an economic perspective that money value changed as time changed taking into consideration the inflation, economic growth, and opportunity costs. I agree that we should use discounting to evaluate investment opportunities. However, I think that environment projects should not be treated as investment projects in term of profit seeking motive. Environmental problems are delicate as they are mostly irreversible and need a long-term recovery process. Furthermore, by discounting future benefits and costs, it is as if we regard future generation as less important than of present generation. For example, the value of providing health services is 100 babies –I do not use monetary value for the sake of intensifying my reason- in the next year, with “r” is 10% the present value of health services is 91 babies only. It means that we value 100 babies in the next year equal to 91 babies in this year and thus 9 babies are discarded. Then the ethical and rhetorical question is “are future beings less valuable compare to present beings?”

For the last argument, I want to relate CBA and real life conditions such as in Indonesia. Indonesia in brief has ill-defined property rights and corruption is eminent. Although CBA try to internalise externalities (i.e. pricing the “non-marketable goods”), it usually collides with corruption practices such as bribery and favouritism. Projects had usually been agreed / selected without even having run any CBA. Furthermore, CBA result is often neglected in decision making process especially when the CBA’s suggestion is in contrary to political/power-holder interest. For example, a project to build a bridge may be selected because the area where the bridge is build is the region that supports him/her to be in power, not because the bridge provides net worth to the greater society. In Indonesia, the common practice of “repaying support” is by building infrastructure such as asphalting the roads and erecting a mosque/church/temple. It is hoped that by doing so, the inhabitant will be loyal to him/her and choose him/her again in the next election. In my personal reflection, CBA is defeated by political/individual interests in my country. The CBA itself is not trustable as the analyst can be “bought” (i.e. ordered to write in favour of the client instead of society) by anyone.

The cost-benefit analysis is indeed a powerful tool, yet it is not a panacea or one-solution-fit-all for environmental problems. It has to be treated with caution. Especially in developing country, CBA is only a formality and thus CBA’s result is not trustable.

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[1] Bent Flyvbjerg, Mette K. Skamris Holm, and Søren L. Buhl, "Underestimating Costs in Public Works Projects: Error or Lie?" Journal of the American Planning Association, vol. 68, no. 3, Summer 2002, pp. 279-295. And: Bent Flyvbjerg, Mette K. Skamris Holm, and Søren L. Buhl, "How (In)accurate Are Demand Forecasts in Public Works Projects? The Case of Transportation." Journal of the American Planning Association, vol. 71, no. 2, Spring 2005, pp. 131-146. Both were taken from Wikipedia. Cost-Benefit Analysis, http://en.wikipedia.org/wiki/Cost-benefit_analysis.

Air Pollution: Case of Indonesia’s Forest Burning

As the dry season reaches its peak in Southeast Asian region, Indonesia is having its annual environmental problem that is the forest fires. Although the forest fires to some extent are part of traditional agriculture method, yet 81.1% of the forest burning is happening in industrial forest [1]. There are around 40000 hot-spots in Indonesia annually with around 15600 hot spots in Sumatra and another 30000 Kalimantan [2]. Sumatra’s close neighboring countries are Thailand, Malaysia and Singapore, while Kalimantan’s are Malaysia and Brunei Darussalam. Those are the countries that directly affected by the forest fires.

The impacts of the forest fires are environmental loss such as the haze production, loss of biodiversity, increased particulate matter, CO₂ emission, and climate change; and economic loss such as airport closure, decreased economic activities (trade, production, and service), and health costs. Of its impacts, the haze production is most protested by neighboring countries such as Malaysia and Singapore as haze is a direct transboundary pollution.

Transboundary pollution needs a transboundary solution such as CAFE programme in European Union[3]. Historically, the ASEAN[4] countries have started the transboundary pollution prevention and abatement practices since 1990, whereas the problems of forest fires and haze are specifically addressed in 1995.[5] In 2002 the ASEAN countries signed the ASEAN agreement on Transboundary Haze Pollution. The agreement along with Regional Haze Action Plan provides ASEAN countries schemes to prevent and to manage forest fires and haze.

Unfortunately, those agreement and action plan remain as on-paper only and not yet implemented, at least up to the moment. Indonesia, for example, in 2006 is dealing the forest fires and haze alone.[6] To some extent, it may appear unfair to Indonesia as it has to cover the negative externalities while it does not receive any compensation for positive externalities of the forest. Moreover, Singapore and Malaysia to some extent are seen as only partially care with Indonesia’s forest, for example Singapore and Malaysia are not wholeheartedly willing to help Indonesia in combating illegal logging. The problem of illegal logging is deepened as timbers are being laundered in Singapore or Malaysia and then exported as legal timber to Europe, USA, Japan, and China [7].

Furthermore, the difficult factors of solving forest fires can be summarized into these categories that are the lack of expertise (information, knowledge, and human resources), ill-defined property rights, conflicting roles and responsibilities of institution concerned with forest, and weak institution.[8] The problems are intertwined with economic interest too.

The forest is being burned in order to cheaply convert it into commercial uses such as plantation and agriculture. The idea of good environmental activities support company’s competitiveness[9] is highly debatable in this context. Competitiveness may be influenced by product price, although not always necessary. However, as the product price is dependent to production function, then an increase in production efficiency caused by technology development will increase company’s competitiveness. And thus, it can be proved that good environmental activities do support competitiveness. To achieve this, research on environmental-friendly technology to increase production efficiency is highly needed. Taking into account the concept of path dependency, such type of research should be encouraged.

Recalling Ricardo’s theorem that is trade is driven by comparative advantage – due to cheaper price – between countries [10]. Price is cheaper since it is believed that exporting countries – mostly developing countries or the-so-called south countries – are natural resource-abundant. However, Chichilnisky argues that the price-led comparative advantage of environmentally intensive products of south countries is deceiving [11]. The well-defined property rights countries have fully internalized the externalities in product price. It also means that north countries products are supplied at higher price compare to south countries at any given price level. Therefore at any price the quantity supplied by south countries exceeds that of north countries, thus creating the fictitious condition of resources-abundant for the south countries.

Ill-defined property rights can be caused by weak institutions and low human resource. Therefore, one recommends that the transboundary pollution prevention scheme also aims on correcting the property rights of the forest. Strengthening law infrastructures, combating corruption, and improving human resource capacity can be part of solutions.

The other way around of intervening the forest fire is through the market-based approach that is environmental protection initiated by business actors. Government approach sometimes is sluggish especially in the developing countries where corruption and nepotism is eminent. Some of market-based initiatives are labelling/certification and corporate social responsibility (known also as corporate citizenship). Corporate Social Responsibility should be seen as an ex-ante approach (before problems) not as an ex-post approach (after the problem).

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[1] WALHI (Friends of Earth – Indonesia), Pembakaran Hutan: Cenderung Menyalahkan Petani Tradisional (translation: Forest burning: a tendency to blame traditional farmer), Press Release 29 August 2006, http://www.walhi.or.id/kampanye/bencana/bakarhutan/060829_kbkrnhtnpetani_sp/.

[2] The observation was run by WALHI on 01-28 August 2006. Ibid.

[3] Commission of the European Communities, Impact Assessment of the Thematic Strategy on Air Pollution and the Directive on “Ambient Air Quality and Cleaner Air for Europe”, Summary, Commission Staff Working Paper, Brussels, 21 September 2005, SEC (2005) 1133.

[4] Association of Southeast Asian Nations (ASEAN).

[5] ASEAN agreement on Transboundary Haze Pollution.

[6] WALHI, Walau ASEAN Janji Bantu, Indonesia Sendirian Tangani Asap (translation: Although ASEAN promises to help, Indonesia is combating the haze alone), 16 October 2006, http://www.walhi.or.id/kampanye/bencana/bakarhutan/061016_kabutasap_cu/.

[7] Currey, Dave, Doherty, Faith, Lawson, Sam, Newman, Julian, and Ruwindrijarto, A.. Timber Traficking: Illegal Logging in Indonesia, South East Asia and International Consumption of Illegally Sourced Timber, September 2001, Environmental Investigation Agency and Telapak Indonesia.

[8] Qadri, S. Tahir, Fire, Smoke, and Haze: The ASEAN Response Strategy, 2001, Phillipines, Asian Development Bank.

[9] Network f Heads of European Environment Protection Agencies, The Contribution of Good Environmental Regulation to Competitiveness, November 2005.

[10] Ricardo, David, The Principles of Political Economy and Taxation. As cited in many books and websites, one of the websites is Wikipedia, http://en.wikipedia.org/wiki/Comparative_advantage

[11] Chichilnisky, Graciela, North-South Trade and the Global Environment, The American Economic Review, Vol. 84, No. 4., September 1994, pp. 851-874.

Culture as a Selling Point of Lombok’s Tourism (1/2)

Introduction
Indonesian’s most famous tourist destinations for domestic tourists are Bali, Jogjakarta-Central Java, Mount Bromo-East Java, and Bunaken-Manado. Bali is famous for its beaches and cultures. Jogjakarta is famous for its Javanese Kingdom (Kasultanan Ngayogyakarta), mount Merapi and the well-known Borobudur, one of the seven wonders of the world. Mount Bromo offers the most scenic sun rise on a mountain. Whilst Bunaken lures tourists using its beautiful coral-reef.

Indonesia is a land of diversity. It is rich in its tradition, culture, folklore, landscape, and culinary. This diversity can be utilized as a selling point in domestic tourism. Each tourist destination in Indonesia thus can offer a unique experience for tourists. However, most of tourist destinations rely heavily on scenic view such as beach, mountain, and country side. Culture is only treated as a minor attraction.

The paper aims to show that culture can be offered as a prime attraction of tourist destinations. A marketing strategy along with short explanation on idea of Lombok’s cultural tourism is briefly discussed in the beginning of the paper. In assessing this possibility, the paper uses the theoretical concepts of myth, culinary tourism, remembered experiences, tourist as a child and modes of experience. Furthermore, the paper also discusses the importance of image construction of tourist destinations especially in the dangerous area. In accordance to Indonesia’s geographic condition, the role of infrastructure in supporting domestic tourism is elaborated in the paper.

The Product
The island of Lombok (Spice island) is located east of Bali. Lombok’s tourism consists of beaches, a volcano – Mount Rinjani, and snorkeling in three Gili Islands (Gili Trawangan, Gili Meno, and Gili Air). Lombok’s residents are mostly Sasak (85%). A tribe that is culturally and linguistically close related to Balinese. The main cultural attractions are the traditional village, the making of various handicrafts, weaving, traditional culinary, and the famous myth of Bau Nyale.

Bau Nyale is a myth regarding Princes Mandalika. Once upon a time, there was a beautiful Princes called Mandalika. She was forced to marry a prince that is not of her choice. Feeling so much in despair, Princess Mandalika then run away from the kingdom. Poor Princess, the prince chased her until a sea cliff. Princes Mandalika in the end choose to jump into the sea below. Suddenly, not long after she was drown, there are colourful ‘Palolo‘ worms (Eunice Fucata) come out from reefs.

According to Sasak’s believe, the worm brings luck, fortune, and safety. Every Sasak will try to catch as much worm as possible during the Bau Nyale day. The quantity of catchments represent how succeed the catcher will be in that year. The worm itself is edible and indeed there are some local cuisine based on this worm.

Marketing Strategy
Marketing strategy composed of segmenting, targeting, positioning, and differentiating (Holloway, 2004). Segmenting is the process of ‘sub-grouping the total consumer market whose members share common characteristics’ (Holloway, 2004). Based on costs consideration, the segment is middle-class income level. The Indonesian’s high class income level -rich- is usually focusing more on international destinations. Targeting is the process of selecting the customers that we intent to serve (Wikipedia, Target Market). The target market of Lombok cultural tourism is youth generation especially young professionals and students. They like to take adventure, exploring exotic places, and undertake new experiences.

Positioning is the technique by which ‘marketers try to create an image or identity in the minds of their target market for its product, brand, or organization’ (Wikipedia, Positioning). As the target market are youth emphasizing on young professionals and students, thus the appropriate positioning will be “adventure into new realm”. “Adventure” indicates that they will be involved in several activities that may be different with their daily activities. “New realm” gives a notion of mystery, uniqueness, and exotic. One predicts that young generation likes to be active and exploring new experiences.

Product differentiation is the modification of a product to make it more attractive to the target market (Holloway, 2004). The product differentiates in experiencing the tradition. Tourists are invited to join the traditional-yet-simple dance, to catch the worm, and to weave famous Sasak’s woven. Upon special arrangement, tourists can experience to live in one of two conserved traditional village.

Youth magazine, MTV, and youth clubs will be used as marketing channels. Approach to teachers and schools may serve well as marketing channels. Activities such as study tour and graduation farewell trip can be proposed to high schools. Weekend outing is tailored for the young professionals. Whilst longer vacation period – there are three long vacations in Indonesia, namely Christmas, New Year, and the Eidul Fitr – is offered to young families and honeymooners as well to young professionals and students.

Story Telling
Myth plays an important role in tourism as myth is a story made of mythological language and every tourist attraction is based on myth (Selwyn, 1996). Stories are constructed and are introduced to tourist from the beginning of their journey. Several advertisement campaigns are carefully developed and are carried out capitalizing on myths. Images such as traditional houses, Sasak’s dress, the Sasak, and ancient landscape; movies – advertisement clips – presenting part of Sasak’s legends, dances, and daily life; and sounds of Sasak’s songs and traditional instruments are sent to potential tourist through marketing channels, brochures, and advertisement on national-wide mass media and are put thoroughly in strategic places in Lombok’s area such as airport, seaport, primary tourist attractions, hotels, restaurants, and roads.

Tourist attractions are arranged to give enchantment using body, nation, object, image, and space (Selwyn, 1996). Tourist mind is seduced by symbolic figures such as statues, signs, and artworks so that tourist feels a “get away” from their daily life into a new realm. Product-knowledge trainings are given to tour operators, guides, and tourist information centres. The trainings cover on Sasak’s history and legends, art performances – dances and songs - and its symbolic messages, mythical places, and Bau Nyale’s ritual.

The prime offer is Bau Nyale’s festival which is celebrated annually and is intensely advertised in national-wide mass media. It takes place in February until March – the worm itself appears only one night around that time. Activities such as traditional dance competition, Princess Mandalika’s story telling and drama contest, concerts of traditional music, and beach-sports are scheduled in a continue phase so that tourists will always have chances to enjoy the festival. There is a performance of Princess Mandalika in every weekend in the Cape Aan near Kuta Beach during the festival seasons. Performers are taken from previous year winner of story telling and drama contest. For the whole period of festival seasons, the Island of Lombok is transformed into a vivid and mythical ambiance.

Culture as a Selling Point of Lombok’s Tourism (2/2)

Culinary Tourism as a Subset of Cultural Tourism
Dining is among the top three favourite tourist activities (Wolf, 2002). Furthermore, Wolf (2002) argued that cuisine is the art form that involves all five senses and it gives a sense of exploration too. According to Kivela and Crotts (2006) ‘gastronomy plays a major role in the way tourists experience the destination, and indicate that some travellers would return to the same destination to savour its unique gastronomy’. Obviously, culinary richness becomes one of the attractions in Lombok's cultural tourism.

However, culinary tourism is not only about dining out. Culinary tourism offers experiences to tourist by involving them in several activities that are related to culinary aspects such as cooking class, excursion to local eateries, learning stories behind traditional foods, and sampling local cuisine. As a starting point, Lombok has already two well-known signature cuisines for domestic tourist that is Ayam Taliwang (grilled chicken with chilli sauce) and Plecing Kangkung (water spinach in a hot chilli sauce). There is already a belief for Indonesians that “one has not yet visited Lombok before savouring Ayam Taliwang and Plecing Kangkung”.

In accordance with Bau Nyale, an excursion will be arranged for tourists to catch Palolo worms in the night and then learn to prepare it into a delicious cuisine. The excursion is ended by having a supper on the beach. A high standard of hygiene is advocated thoroughly in Lombok’s eateries. Trainings and inspections will be run periodically by health department to ensure food safety in all Lombok’s eateries. Certificate is issued to eateries that passed the inspection. This is done in order to reduce the risk of food poisoning. Although tourists feel safer at home, food safety is an important issue that can influence potential tourist’s decision on which destination to choose (Larsen et al., 2005).

Predicted, On-line, and Remembered Experiences
There is a positive relation between experience and behaviour as people repeat experiences that they enjoy (Wirtz et al., 2003). Furthermore Wirtz et al. (Ibid) found that predicted and remembered experiences are both more positive/negative than on-line experience. They concluded that the remembered experiences that best predict future choice rather than online experiences. However, as the vacation ended, vacationer forgets the disappointment (Mitchell et al., 1997; cited in Wirtz et al., ibid) and reinterprets vacation memories in ways consistent with original expectations (Klaaren et al., 1994; cited in Wirtz et al., ibid).

Giving adequate information to potential tourists through web-sites, brochures, and tourism representatives are carried out to shape nice predicted experiences. Cheerful greetings at the arrival gate – airport and harbour –, warmth services on tourist needs, and cordial farewell to tourists are always encouraged in Lombok. Timely assistance is provided to troubled tourists. Not to mention in keep maintaining a good relationship with tourists via newsletters containing special offer and recent improvement in Lombok’s tourism; and via personalized greeting during special occasion such as birthday, new year and other religious festive. One predicts that those attitudes will provide good remembered experiences that tourists want to repeat.

Tourist as a Child and Mode of Experiences
Tourists should be dealt with as children (Dann, 1996). There is a need from a child- tourist to seek comfort, protection, attention, and nurture from a mother-provider. Thus provider – i.e. tour operators – should provide adequate information for instance accommodation brochures, places to visit, and tourist’s map; and prompt services to clients – i.e. tourists. Tourist information centres will be erected in strategic places – airport, harbour, and Kuta beach – around the island to feast tourist’s hunger of information.

Lengkeek (2001) reformulated Cohen’s mode of experiences into amusement, change, interest, rapture, and mastering. Cultural encounters are set to meet up with various tourist experiences from the amusement of seeing Sasak’s dance to sense of mastering of living as the Sasak.

Image Construction
There was a riot in Lombok in 2000 between ethnic groups and religions which had devastated the image of Lombok as a safe destination for tourists. This flashbulb memory is long-lasting, extremely vivid, and connected with unexpected emotionally laden events (Myers, 2003; cited in Talico and Rubin, 2003). To prevent such memory from deterring domestic tourists visit to Lombok, security system has to be tightened. Assurance on the tourists’ safety should be given by government and community leaders.

Tourism is about image building (Pitana, 2006). Learning from Bali’s case – i.e. the Bali Bombing I and Bali Bombing II – the image of reconciliation between conflicting groups and peaceful nowadays daily life must be transmitted to domestic tourists. News and short documentary movies about peaceful daily life and security assurance will be advertised in national-wide mass media. By doing so, Lombok will once again have the image of a safe tourist destination.

Infrastructures as supporting facilities
Infrastructure such as transportation and accommodation influence the number of tourists visit. Touristic destinations with adequate transportation infrastructure attract more visitor rather than destinations with poor transportation capacity and infrastructure (Tisdell and Wen, 1991; cited in Zhang et al., 1999). Up to the moment, the island of Lombok can be reached through Selaparang international airport, and boat or ferries from Bali. The airport serves frequent flights to Denpasar (Bali) and Surabaya (2^nd biggest city in Indonesia), single flight to Jakarta (capital of Indonesia) and Yogyakarta, and international flights to Kuala Lumpur–Malaysia and Singapore. The airport should be improved so that it can serve more flight connection to other cities in Indonesia and bigger airplane. Roads within the island will be improved or at least maintained at its present condition. This is a large investment; priority will be first given to the primary road in the island.

Potential Conflicts
Tourism creates conflict of access to public goods such as water, roads, and food. Moreover, there is a potential conflict between the need of society advancement – for example, new house’s architecture – and the preservation of antiquated atmosphere – that is the ancient house. More importantly is the problem of economic leakage that is the condition where host (Lombok) only gains small portion of money distributed in the tourism industry. Leakage takes place as the biggest proportion of vacation costs lie in the transportation and hotel-network.

Greater employment opportunity for Lombok’s inhabitant, credit facility for small-medium enterprise, and management consultancy are provided for Lombok’s population. A careful island planning has to be carried out outlining future property development and preservation of cultural objects. In all process, public participation from Lombok’s inhabitant is crucial and thus highly encouraged.

Conclusions
Culture is feasible enough to be a main selling point of a tourist destination. Adequate supply of information plays important rule in supporting cultural tourism. In a cultural tourism, myth should be told or created to lure potential tourists. Local’s oral history (legends, traditions, and beliefs), symbols and signs are good base for making a cultural tourism attraction. Tourist’s experiences can be created through excellent and friendly services that nurture all tourists’ needs and tourist involvement in cultural activities or attraction. Infrastructures as supporting facilities must be maintained to its fullest.

However, it is not clear enough on how big is the proportion of cultural-oriented tourists in Indonesia. Thus researches on tourist behaviour and identification of characteristic of cultural-oriented tourist may become interesting topics. Another interesting research topic is on synergizing Bali’s tourism and Lombok’s.

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