Tuesday, March 13, 2007

Lighting Up Rural India: Second Draft Analysis

Mr. Harish Hande has been for the past few years been working to bring electricity to the countryside, through his solar-energy company Selco India. By servicing the poor rural population, he is "tapping an undesirable market", and doing something no one really dares to do. All this has produced positive externalities and spillover benefits. In fact, these are so significant, that the same ideas are being implemented in the States, and in Europe, demand for solar cells are rising such that it is now threatening the existence of Selco India.

As mentioned, the firm's transactions have produced spillover benefits. Spillover benefits are a result of a transaction, and will be enjoyed by a third party. Usually, as in this case as well, this third party is society. It is a market failure, as there is an under-allocation of that product in the market. In this article specifically, we can see that the children of the rose pickers have increased study time due to the better lighting from the lights their parents bought. This will eventually lead to better educational standards in the region, and thus each individual will be able to contribute more entrepreneurship and intellectual resources to the society. Not only that, the families have to suffer from fewer fumes, which are created by gas lamps. But those are miniscule in comparison with the bigger picture.
Here is a possible start to dealing with poverty. Although the firm still behaves like any other firm, as in they would like to maximize profits, Mr. Hande has a dream of eradicating poverty in his region. This is the reason that he has "tapped the undesirable market". However, as he ventured out, he was told that rural people don't pay their loans, and naturally they do not have the money to buy the captial right away. Acting on the principle that necessity is the mother of all invention, "innovative financial transactions" were called for.
His efforts have paid off, as now only "10% of his clients default". The spillover benefit here is the intellectual contribution made to the business world. We now have a model for future business dealings with the less-privileged.
Also, those following his example have unleashed a wave of entrepreneurship, such as the rick-shaw driver in Bangalore who made considerably more when putting Hande's product to alternative use. This wave of entrepreneurship will ultimately lead to developments in all areas. This type of innovation is good for the society and has a special economic term; technology spillover.

Thus, solar cells could be called a merit good. Merit goods are goods that are under-provided by the market, and thus under-consumed by consumers. They are also deemed to be of positive benefit to the society, so their consumption should be increased. In this market the Selco India product is being under-provided, and as a result is under-consumed, and it is of positive benefit to society.

However, it is being threatened by increased European demand for solar energy. Based on this information, it is safe to say that the solar-cell industry is an increasing cost industry (fig. 1.1). This means that as more solar-cells are produced, the more expensive it becomes to produce them. Thus, when European demand goes up, so do the costs for Selco India. It is therefore only natural that they would experience losses of $63,000.

Naturally, as a positive externality in itself shows an under-allocation of resources in the market, and the competition from Europe, it looks as though Selco India may need some help in producing the cells that help so many. This is where the government could come into play. Seeing as the costs for Selco India have increased dramatically due to increased European demand, and the already existing need to increase production, a subsidy appears to be in order. The subsidy would increase the output of Selco India and any other firm like it by helping the firm to cover the cost, such that it can produce at a desirable output. As shown in fig. 1.2, a subsidy would correct the market failure and bring solar energy, along with all its benefits, to rural India.

1 comment:

Jason Welker said...

Marco, I see here your latest incarnation... very good. We'll do some peer editing of this tomorrow in class. Disregard my last comment on the previous draft, I did not see this one until just now!

Mr. W