1. 5. External effects & public goods
GENERAL ECONOMICS 5
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2. 5.0 OVERVIEW G 5 / 2 5.1 EXTERNAL EFFECTS page G 5 / 3
5.2 PUBLIC GOODS page G 5 / 13
5.3 EXERCISES page G 5 / 17
5.4 VOCABULARY page G 5 / 22
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3. G 5 / 3
5.1 EXTERNAL EFFECTS
The production of products and services may have an impact on third parties not involved in the production = external effects
These effects may be negative:
Decreasing wealth
Example: nuclear energy production >>> long-term impact on environment (negative effects of nuclear waste)
These effects may be positive:
Increasing wealth
Example: education >>> long-term impact on society (positive effects on employment and society as a whole)
Think of other examples:
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4. G 5 / 4 Production of products and services generates costs
We call these: internal costs (private costs)
Costs generated by negative external effects = external costs
Benefits generated by positive external effects = external benefits
The concept of “social costs” takes into account both internal and external costs/benefits:
SOCIAL COSTS = INTERNAL/PRIVATE COSTS + EXTERNAL COSTS
SOCIAL COSTS = INTERNAL/PRIVATE COSTS EXTERNAL BENEFITS
Let us assume that the production of aluminium creates negative external effects, how would the supply and demand model look like?
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5. G 5 / 5
Comments:
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6. G 5 / 6 Draw a supply and demand model for the market of beehives
Comments:
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7. government will take measures
The price mechanism on the competitive market fails because the market equilibrium does not take into account external costs/benefits
government will take measures
to “correct” the market price (to “internalize” the external costs/benefits)
Quota
Examples of products/services their external effects:
Taxes
Examples of products/services their external effects:
Subsidies
Examples of products/services their external effects:
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8. G 5 / 8 Beside these “quantitative measures”, other measures are:
Standards/restrictions
Examples of products/services + external effects:
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9. G 5 / 9
Economist COASE suggested that negative external effects should be dealt with WITHOUT government intervention
Coase theorem states that when property rights are involved, parties naturally gravitate toward the most efficient and mutually beneficial outcome, and this trhough negotiation.
The Coase theorem states that where there is a conflict of property rights, the involved parties can bargain or negotiate terms that are more beneficial to both parties than the outcome of any assigned property rights. The theorem also asserts that in order for this to occur, bargaining must be costless; if there are costs associated with bargaining, such as those relating to meetings or enforcement, it affects the outcome.
Let us take the case of a family owning a house and a piece of land outside the city. A foreign company built a wind turbine near the property. The wind turbine causes (negative) external effects.
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10. G 5 / 10
Comments:
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11. G 5 / 11
An international way to deal with the negative external “greenhouse effect” is the so-called “Kyoto Protocol”
The Kyoto Protocol is an international treaty which extends the 1992 United Nations Framework Convention on Climate Change (UNFCCC) that commits State Parties to reduce greenhouse gas emissions, based on the scientific consensus that (a) global warming is occurring and (b) it is extremely likely that human-made CO2 emissions have predominantly caused it.
Under Kyoto, industrialized nations pledged to cut their yearly emissions of carbon, as measured in six greenhouse gases, by varying amounts, averaging 5.2%, by 2020 as compared to That equates to a 29% cut in the values that would have otherwise occurred.
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12. G 5 / 12
Parties with commitments under the Kyoto Protocol have accepted targets for limiting or reducing emissions.
Emissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that have emission units to spare - emissions permitted them but not "used" - to sell this excess capacity to countries that are over their targets.
Thus, a new commodity was created in the form of emission reductions or removals. Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is known as the "carbon market."
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13. G 5 / 13
5.2 PUBLIC GOODS
Most products and services traded on the markets are PRIVATE GOODS; these have 2 characteristics:
Rivalrous: the consumption of a specific good by a specific person will block another person to buy that same good
Excludable: access to the good is only possible if the buyer pays the market price
3 other types of goods occur in daily economic life, but are not traded on the markets:
PUBLIC GOODS
COMMON GOODS
CLUB GOODS
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14. G 5 / 14 Characteristic PUBLIC GOODS COMMON GOODS CLUB GOODS Rivalrous
Y/N + explanation
Excludable
Examples
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15. G 5 / 15 Why do mostly governments offer “public goods”?
Why is the production of public goods “privatized” in some cases?
+ find examples of privatization
+ analyze consequences: was it a successful operation?
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16. G 5 / 16 What is the concept of “freeriders”? Comments:
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17. G 5 / 17
5.3 EXERCISES
1) Factory ABC INDUSTRIES is located near a residential area families live in this area. As a result of the air pollution created by the company, each family experiences a negative external effect (laundry gets dirty). This costs € 150 per year per family.
There are different solutions:
- ABC may install a filter installation: cost = €
- each family gets a tumble dryer: cost = € 130 per family
What would be the most efficient way to deal with the negative external effects?
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18. G 5 / 18
2) This is the demand curve on a specific market: Q d = - P And this is the supply curve: Q s = 2 . P
a. Calculate the market equilibium
The product causes negative external effects and the government decides to set a tax of €30 per unit
b. Calculate the new supply curve
c. Calculate the new market equilibrium
d. Calculate the % of tne tax paid by the consumer
e. Calculate the total tax revenue for the government
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19. G 5 / 19
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20. G 5 / 20
3) Think of 3 reasons why governments provide good traffic infrastructure
4) Take a close look at the following examples of products and services: what types of goods are these?
Electricity
Police
Cinema
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21. G 5 / 21
Highway
Food
Sports club
5) Analyze how the company that produces MARLBORO has been dealing with the negative external effects of cigarettes over the past years:
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22. G 5 / 22
5.4 VOCABULARY EN NL
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23. G 5 / 23 EN NL
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