Business economics Paper

Dear Consultant,

The Minister for Mines in Western Australia, the Honourable Bill Johnston, has requested a concise briefing due to this government’s concern with the financial status of the lithium industry, and the pollution the industry creates.

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The Minister has seen the recent news coverage listed here:

• Crunch time for lithium sector, The Australian

We request you advise the Minister on the following questions. For each answer, concisely summarize your main recommendation and the economic principle(s) supporting your recommendation. Please use simple research with appropriate citations when necessary, so that the Minister may read more if required. As this is a Ministerial Briefing, if you find that additional information is required for a precise answer please state what this is, and we will pursue this internally within the Ministry. Please provide each answer under a separate numbered point.

1. The recent entering of voluntary administration by Alita and has alarmed the Minister. It appears that many WA lithium mining companies are currently losing money due to low prices. The minister notes he has heard that the other countries’ governments have, when facing low prices for their resources, restricted output to improve the profitability of the industry. The Minister requests your advice: do you advise the WA government to intervene in the lithium market, restricting supply from WA mines in order to improve profitability for the lithium mines?

2. The next WA State election will occur in March 2021, and this requires preparing a budget projection for the State covering the following 5 years after the election. Being able to forecast large revenues over the post-election period will allow the government to claim it has balanced the budget. When resource companies earn large economic profits, taxes on this profit creates very substantial revenue for the WA government. When the industry earns normal levels of profit, the WA government earns very little tax revenue from the resource industry. The Minister has seen the news coverage of the current lithium surplus causing economic losses, and that the mining industry already anticipates the substantial rise in lithium demand expected in the mid-2020’s as electric car production increases. The Minister has also seen confidential information that the Chinese government, as part of its efforts to address climate change, might announce a requirement that all car sales be electric starting in Q1 2021, but will not announce this plan until Q1 2020. If this occurs, it would cause a very large additional rise in electric car production, and the lithium industry remains unaware of this potential announcement.

Please advise the minister on whether the WA government can project substantial revenue from taxing lithium mining profits when it creates its 2021 budget.

3. The WA Environmental Protection Agency reports that every tonne of rare-earth mining causes a large harm—and this harm is constant for each tonne—from water pollution that impacts nearby local communities. The EPA has proposed internalizing this externality through a tax applied to each unit of pollution, and this tax would equal the environmental damages of the pollution. The Minister for Mines is concerned about the impact of this proposed tax on the mining industry. In particular, the Minister has seen a recent presentation from the lithium mining industry where they claim that this environmental tax will not improve the environment, but instead simply cause industry to shift abroad. Please brief the Minister on this claim.

4. A source of the rarest rare earth elements has recently opened in WA! This mine is the first for this element in the world and there are no known other deposits of this element. The element can be used to make unique high-capacity batteries, but it also causes the same pollution externality costs on the nearby communities as lithium does. The EPA has proposed regulating it with the same tax on pollution as lithium. The Minister requests a briefing on whether this tax will increase economic surplus. (note— this example is fictional so you will not be able to research such a ‘rarest rare earth element.’)

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