Money for Nothing: Exploiting Negative Externalities - Assignment Example

Economics Assignment Student’s Name: ID Number: Date: Questions (a)           Explain what negative externalities are, and why there may be a case for government intervention to address them. Describe some of the ways to correct the negative externalities and the pros and cons of each method. Provide real life examples.        (5 marks) Negative externalities refer to unfortunate events or costs that third parties incur as a result of certain economic activity in the society (Deng, & Pekec, 2011 p.13). Sometimes an economic activity may have spill over on people that are not in any way involved. A good example is where a factory emits carbon to the air thus affecting the people residing in its vicinity. Even those people who are not consumers of its products pay the cost of unhealthy air due to such production. It happens as a result of shared resources such as air which no one can claim ownership (Benito, Ezcurra, & Eraso, 2014, p.46). The society cannot prevent the factory from producing goods even if the production is harmful to its livelihood. To address these externalities, government plays a key role in protecting the welfare of the entire society. Although the government appreciates the role of factories in economic development, it may opt to discourage such establishment. It happens when the negative externalities have extreme effects thus incurring costs that are exceeding benefits (Deng, & Pekec, 2011 p.24). In such case, if the cost associated with poor health due to pollution is much higher than benefits of factory existence, then the government may use legal means to eliminate that factory. In this way, the government is said to have intervened with an aim of addressing the issue of pollution and third party concerns. There are several ways in which the government may correct the negative externalities in the society. One, the government may decide to introduce heavy taxes on goods that are produced by such factories. Obviously, when taxes are high, such cost is pushed to the final consumer by increasing the cost of products in the market. Such goods become unaffordable thus affecting their sales (Kotler, 2011, p.47). Consequently, the production cost becomes unbearable thus discouraging production of a commodity. In this way, the government helps the society by eliminating the potential health risk. Again, the government may introduce laws that control establishment of such factories in the society. The method works well where goods produced have high demand and their sales may not be affected by heavy taxation. The government may opt to ban such establishment with an aim of saving the society from negative externalities. Heavy taxes on products and factory income is punitive and such measure discourages productivity in an economy. It discourages investors hence forcing them shift to other favourable markets. As a result, the economy is forced to import the products from other markets thus affecting the balance of trade negatively. More money in an economy is spent in importing products thus benefiting other economies (Benito, Ezcurra, & Eraso, 2014, p.51). However, the government helps the society sustain good health and prevents unnecessary cost of combating diseases such as cancer among others. Good health in any society attracts other investments that may compensate the cost of imports. Real life example of a negative externality is having a factory producing cigarettes. Such factories have adverse effects on bigger part of the society which does not consume cigarettes. Cigarette smokers pollute environment as well as non-smokers. People who are not directly involved in production cycle end up suffering thus paying unnecessary cost. Neither cigarette factories nor smokers compensate the society for such negative external effects. Imposing heavy taxes on these products discourages both smoking and cigarette production. The government may raise taxes to a level that such activity becomes unsustainable as well as unprofitable to the factory. Such intervention may be an ideal measure to address the challenge of negative externalities. Another example is a car manufacturing company in the society. Cars are known for emitting carbon in the air and when many people own them, the level of carbon increases thus posing a health risk in the society. In addition, traffic jam is harmful to the smooth flow of economic activities in an economy. It happens when there are excess cars on the road thus slowing smooth flow of traffic. It causes unnecessary delays especially in public transport and movement of goods from one point to another. Through this, the economy suffers due to hours wasted on traffic jam. Third parties suffer through such negative effects on environment. Recipients of goods also suffer due to delays in delivery although not directly involved in car manufacturing activity. The government may impose higher taxes on personal cars in order to decongest the roads and maintain smooth flow of traffic. (b)          Choose a case study from your home country where an externality exists in a current market. Using the key characteristic of four market structures identify the type of market structure in your case study (i.e. monopoly, oligopoly, perfect competition or monopolistic competition). Illustrate the situation with externalities in your case study and the resulting deadweight loss in a diagram and discuss ways that your government has addressed the presence of negative externalities in the market.   (15 marks) China is one of the countries experiencing rapid economic growth due to industrialization. As a perfect competition market, the government encourages investors to produce commodities in large volume. Since interest rate and taxation is low, it becomes cheaper for the Chinese to engage in massive production (Tian, Wang, & Chen, 2010, p.56). The government has also used currency devaluation as a tactic to compete other economies in international markets. Demand for Chinese goods continues to grow thus increase its production. Due to this situation, there are various externalities that exist in this particular economy. They include massive pollution of environment, regional inequality, congestion and high unemployment rate. Although the government continues to raise revenue and to enjoy surplus in foreign exchange, there are people who suffer due to these economic activities that take place within China. Presence of many industries pollute environment by emitting carbon to the air and other waste products to the rivers. As the carbon continues to increase in air, the climatic change happens hence affecting the country and neighbours negatively. Note that continuous emission of carbon in the air is the main cause of global warming and other environmental concerns. It is caused by industrialized economies such as China. It contributes to current suffering of people that are neither producers nor consumers of its products (Zhang, et al, 2013, p.63). The situation also affects people within China who suffer ailments due to excessive carbon in the air. mps Carbon Emission Production capacity Production of goods The diagram above shows the increasing rate of production in China and subsequent increase in carbon emission thus causing negative externality to the society. Industrialization attracts people from different regions thus causing over population in areas where economic activities take place. The situation further causes inequality in population distribution whereby some regions are deserted hence remain underdeveloped. People who remain behind tend to suffer due to lack of government services (Kopf, Carnevale, & Chambers, 2012, p.85). The government tends to concentrate on areas where there are economic activities thus disadvantage to the rest of the population. This situation is evident in China where there is unequal distribution of resources. Due to massive movement of population to the industrialized areas in China, the country experiences the challenge of congestion in urban areas such as Guangzhou, Shanghai and Beijing among others. Where there is congestion, health situation deteriorate (Combes, et al, 2013, p.59). Such scenario affects the entire society regardless of one’s involvement in economic activities. People compete for resources available thus causing unnecessary suffering to third parties. In addition, migration of people from various places to China is the major cause of unemployment. Many people end up being poor due to lack of income generating activity. People compete for available opportunities. Investors in China provide employment to foreigners who reside there making Chinese citizens unemployed (Zhang, et al, 2013, p.73). Aspect of unemployment tends to become more acute as people move into the country from other regions. Consequently, economic situation of these people become worse as the industrial activities increase and population migrate into the country. The government of China applies several measures in addressing these negative externalities. Signing of Kyoto agreement is among the major steps that the government has taken to demonstrate its commitment to safe environment in the midst of industrial activities. Again, the Chinese government encourages its people to engage in trade especially exports. It looks for the market outside China hence providing an opportunity for its people to sell their products (Wang, & Chen, 2014, p.94). As a result, it addresses the challenge of unemployment in the country. Introduction of subsidies is also another measure that encourages Chinese citizens to engage in foreign trade. The government provides social amenities and services at relatively low rates to enable the citizens and residents cope with challenges. There are hospitals with all necessary facilities in many parts of China thus helping people receive medication in case of diseases. The government plants trees in forests and ensures that the country has sufficient trees to curb the problem of carbon emission. Although people still experience problems, the government is really concerned about people’s welfare (Wang, & Chen, 2014, p.107). It is able to combat any potential threat in regions that are over-populated by providing adequate resources. It has also started a program of boosting industrialization in coastal areas with an aim of decongesting the city. (c) Suggest other options for dealing with negative externalities in your case study. Outline economic reasons for your suggested options. Since the government collects revenue from industrialists and other traders, it should use the income to provide social amenities such as health facilities to the public. Although this has been done for long, the government of China has a long way to go since the facilities are not adequate to serve the population sufficiently (Jiang, & Xu, 2012, p.37). For any economy to sustain its growth, it must have healthy population thus provision of health services is not an option to ignore. The economy thrives where manpower is healthy since it is able to deliver optimum level of competence. The government should enhance ‘One Child Policy’ in order to control population within China. High population is among the causes of unemployment since economic activities cannot sufficiently provide employment for every person in China. High population also makes people to compete for the available resources thus reducing the chances of people flourishing economically (Choukhmane, Coeurdacier, & Jin, 2013, p.77). In most cases, people who are not directly involved in the production end up suffering. Unemployed person has neither production nor purchasing power. It means that he or she is likely to become a victim of negative externalities in competitive market like China. Low population becomes an ideal option when dealing with such situation hence the policy should be encouraged and enhanced. The Chinese government should also become strict on admitting foreigners in the country. It should introduce laws that give local population a priority in getting employment. It ensures that foreigners come only to invest hence provide employment chances rather than competing for available opportunities. This also ensures that cities are not over-populated thus giving the government an easy time in providing essential services. Once bigger part of the population is employed, the country is able to enhance the purchasing power for its people hence avoiding effects of negative externalities. Carbon credit policy is also an ideal measure for combating negative externalities in China. This is where the government charges industrialists amount of money and provides incentives to those who plant trees. The amount collected from industries is used to compensate those who assist in fighting environmental degradation. It encourages people to plant more trees and discourages industries from emitting excessive carbon in the air (Jiang, & Xu, 2012, p.61). The policy is beneficial to the producer, consumer and third party. Every person is brought on board in benefiting from the production of goods and services. In addition, it enables the country to conserve its environment thus combating global warming which is a concern to many economies throughout the world. Encouraging advanced technology in production can also help in addressing negative externalities in China. When advanced technology is used, it is easier to adverse effects in production such as environmental degradation. It also increases efficiency in terms of cost of production hence making goods affordable. People who are not employed may also afford such low cost products thus preventing negative externalities from affecting them. Again, as technology advance, opportunities for employment increase. It comes with opportunities especially for those who are skilled. In a nut shell, application of advance technology in industries is an effective way of addressing spill over in production of goods. Reference Benito-Ostolaza, J. M., Ezcurra, R., & Osés-Eraso, N. (2014). Negative externalities in cropping decisions: Private versus common land. Ecological Economics, 105, 185-192. Choukhmane, T., Coeurdacier, N., & Jin, K. (2013). The One-Child policy and household savings. Centre for Economic Policy Research. Combes, P. P., Démurger, S., & Shi, L. (2013). Urbanisation and migration externalities in China. Deng, C., & Pekec, S. (2011, June). Money for nothing: exploiting negative externalities. In Proceedings of the 12th ACM conference on Electronic commerce (pp. 361-370). ACM. Jiang, S. B., & Xu, J. J. (2012). Carbon Tax Research Based on the Perspective of the Low-Carbon Economy. Advanced Materials Research, 524, 2356-2359. Kopf, J., Carnevale, J., & Chambers, D. (2012). Globalism, capitalism, and negative externalities: Anecdotes of bad behaviour. Kotler, P. (2011). Reinventing marketing to manage the environmental imperative. Journal of Marketing, 75(4), 132-135. Tian, L., Wang, H. H., & Chen, Y. (2010). Spatial externalities in China regional economic growth. China Economic Review, 21, S20-S31. Wang, D. T., & Chen, W. Y. (2014). Foreign direct investment, institutional development, and environmental externalities: Evidence from China. Journal of environmental management, 135, 81-90. Zhang, Z., Jin, X., Yang, Q., & Zhang, Y. (2013). An empirical study on the institutional factors of energy conservation and emissions reduction: Evidence from listed companies in China. Energy policy, 57, 36-42. Read More