Monday, March 12, 2007

Lighting Up Rural India: A Rough Draft [Analysis]

http://money.cnn.com/magazines/business2/business2_archive/2006/12/01/8394996/index.htm?postversion=2007030120

[THE GRAPHS WILL COME LATER. THEY HAVE BEEN MADE. CURRENT WORD COUNT WITHOUT CAPTIONS IS 591, SO WITH THE CAPTIONS I SHOULD BE OK]

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 spill-over 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 spill-over benefits. Spill-over 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.
However, he has defied those who discouraged him, as now only "10% of his clients default". This could also serve as a model for future business dealings with the less-privileged, thus benefiting society.
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.

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. Thus we could even go so far as to claim that the solar-cells will become a merit good. A merit good is under-provided by the market, which the Selco India product is, and as a result will be under-consumed, as they are. This is where the government could come into play. 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.

4 comments:

Jason Welker said...

good start here, but your commentary seems to drift off topic when you start talking about the history of defaulting on loans and this new type of finance...Then you get back onto relevancy when you discuss the increasing cost nature of the industry. I think you may as well remove the middle section. You definitely can offer some more concrete analysis of the existence of merit goods in India (aren't solar headlamps merit goods because they create so many positive externalities?) You don't mention the word merit goods though or define it.

You do later say that solar cells are merit goods, that's good... but your explanation of the policy solution is too brief.

Needs a little more work, but I like what you're doing here!

Mr. W

Marco G. said...

Mr. Welker,
Are the innovative financial transactions not also a spill-over benefit caused by this activity, thus discussion in my analysis necessary? I'm not sure, I'm asking.
Should I introduce the idea of merit goods earlier in the article?

What else is there to discuss about the policy solution? I mean, the solution is to give subsidies in order to increase output, right?

Jason Welker said...

Marco,

Am I correct that this blog entry has not changed since Monday's class? Make sure you've got your final edits made before class on Wednesday, I want us to do some peer editing during class, so for that reason this should be done beforehand! Make your final edits tonight or today so you're prepared!

Mr. W.

Marco G. said...

No problem Mr. Welker!
I think its good now...