Q&A: Externalities and External Costs and Benefits
Could you please explain the meaning of externalities in relation to marginal social cost, marginal social benefit?
Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid. Externalities occur outside of the market i.e. they affect people not directly involved in the production and/or consumption of a good or service. They are also known as spill-over effects.
read more...»A nudge towards a lecture?
A heads up on a lecture by the co-author of one of the most talked about books in behavioural economics, at the LSE on Monday 23rd March.
read more...»Trade-offs in the off trade
Proposals to tackle alcohol-fuelled violence and health related problems in Scotland were announced yesterday. This is government intervention to tackle the market failures that result from alcohol, which has been a regular issue discussed in England and Wales as well. Some of the statistics given in this video report spell out the reasons for the concern north of the border; there has been a 20% increase in the number of people being discharged from hospital following alcohol-related treatment, Scots drink the equivalent of two litres more pure alcohol each per year than the English, and alcohol-related liver disease has overtaken heart disease as one of the top three killers there.
read more...»New Revision Presentation on European Carbon Emissions Trading
This new tutor2u revision presentation looks at:
- Can carbon markets be part of the answer in controlling climate change?
- What is the basic economics of carbon trading?
- Is the EU system working?
- What are the alternatives / complements?
- Should carbon trading be replaced with a carbon tax?
Download PowerPoint presentation
Call in the Passion Police!
Virgin Trains have introduced a new regulation at Warrington Station. They are concerned about the negative externalities for travellers, and loss of earnings for taxi drivers, caused by people spending too long on their farewells in the designated Drop-off Zone in front of the station entrance, so have made this a No Kissing area! This short video report is worth watching – there is an approved Kissing Area for the use of those who feel the need, and the Station Manager, interviewed by a reporter who suggests that this is “virgin’ on the ridiculous” claims that it is a tongue in cheek idea…….and no, it’s not the 1st of April!
Our Daily Bread
In a similar vein to Manufactured Landscapes, Our Daily Bread is a no holds barred documentary on industrial farming and food processing. It is available for purchase in DVD format through Amazon UK.
read more...»Coal and CO2 emissions - Poland
Almost all of Poland’s power comes from coal and much of the cheap brown coal is very expensive in terms of CO2 emissions.
This level of dependency on a dirty fossil fuel has been headlined this week as the climate change conference in Poland confronts how best to cut emissions. The BBC environment correspondent David Shukman has been at Poland’s largest mine in Belchatow and his report provides a good resource on the issue of how best to encourage some of Europe’s emerging market economies to lower their emissions.
Louis Theroux - Crime and Economics in Action
The Louis Theroux documentary on law and disorder in Johannesberg is a fantastic documentary to demonstrate just a few economic concepts to students as a christmas treat.
Before the lesson lead a discussion - ‘to what extent is policing a public good?’
Then another discussion leading from,‘to what extent do you think policing should be a public good, i.e. provided by governments?’
Then introduce or perhaps revise the concept of government failure and how governments may fail to provide policing to a desired quantity.
The programme demonstrates how there may be a demand for private police agencies run by the free market in South Africa, because the government fails to provide adequate policing to a desired quantity.
Other points for discussion included in the programme may include; income inequality, the costs of unemployment, external costs associated with slum housing. Also note other government failures the S.A. government are guilty of e.g. failure of information provision for AIDS HIV Virus.
A discussion on the paternal role of governments may also be considered.
The show also raises all sorts of other ethical debates which Louis questions. Try to avoid getting bogged down in these those, keep it to economics!
Marcus
Not to be sneezed at
My local Costa Coffee was heaving this afternoon as weary christmas (window) shoppers stopped to refuel and browse the Sunday papers. One punter had an uncontrollable cough and another was sniffling away to his hearts content totally oblivious to those around him. This unsavoury situation reminded me of an article spotted in the Telegraph a few days ago about the threat carried by one single uncontrolled sneeze in a public place, be it a bus or crowded plane or gymnasium. Perhaps the government should consider face masks as a merit good?
Economies of Scale - Giant Wind Farms
This BBC article on the granting of permission for a giant wind farm off the coast of North Wales might be a good example of the importance of economies of scale in making renewable sources of energy more cost efficient. And heading to the web site of the Gwynt y Môr Offshore Wind Farm accesses some resources on the potential costs and benefits of a scheme that might provide electricity for up to 500,000 homes. If construction goes to plan, the wind farm will start to produce power from 2012.
The fool’s gold of carbon trading
Jonathan Leake has a substantial article here on the future of carbon trading in Europe. I will be writing in more depth about carbon trading for the next edition of EconoMax ... but on a quick reading this article is deeply critical of some of the unintended consequences of the scheme and the flawed arrangements surrounding the inception of the 1st phase of EU-ETS. Worth a read if you are preparing for questions on government intervention in markets.
End tobacco smoking by 2025?
Could we end the smoking of tobacco in the Uk within a generation. On first glance it looks like one of those utterly grandiose targets that New Labour used to launch (and re-launch) such as abolishing Child Poverty by 2020. But this ultra-ambitious target comes from the Royal College of Physicians who argue that radical measures are needed to curb smoking. They argue that “The primary objective of regulation of smoked tobacco should be to make smoking and smoked tobacco products as unappealing, unattractive, unaffordable and unavailable as possible, as quickly as possible.”
The measures include:
Increase the tax on tobacco by 10% every year
License tobacco retailers and prohibit the sale of smoked tobacco in premises where children are admitted
Crack down on tobacco smuggling, and apply Class A drug penalties for tobacco smuggling and under-age sale
Encourage sale of low cost single day nicotine packs, available from any retail outlet
Permanently exempt medicinal nicotine from VAT
Provide free medicinal nicotine for all smokers on the NHS, not just those on a smoking cessation programme
What do you think?
Ending Tobacco Smoking in Britain is available here
Oil sands - an enviromental catastrophe?
“The Caterpillar 797B heavy hauler is the world’s biggest truck. It’s taller than a four-storey house, as wide as a tennis court and it removes nearly 35,000 tonnes of oily sand a day from a deep open cast mine in northern Alberta in western Canada.”
John Vidal heads to Canada to ask some tough questions of the oil industry and its intentions in northern Alberta in this Guardian video report. This video is backed up by this report. Some of the photos of the plant and equipment being used are truly stunning - I will certainly be using this when I teach about economies of scale next autumn. The size of the oil sands exploration is astounding and the economic boom hitting this northern wilderness in places such as Fort McMurray beggars belief. But so too are the environmental consequences of this black gold rush
“The downside is ecological devastation and soaring greenhouse gas emissions on a scale that is beginning to alarm Canadians and other western countries trying to reduce the intensity of their carbon economies to counter climate change. Canada, alone, of developed countries, is expecting to increase emissions for 30 years and ignore its commitments to Kyoto.”
Peter Day looked at this issue a couple of years ago and his In Business report is still available on the BBC web site
Image from creative commons licence on Flickr.com
Education (AQA), Education (Edexcel), Education (OCR)
After finishing my A levels in Edexcel French, OCR Economics and OCR Further Maths yesterday, I had a discussion with a friend (thanks Ben!) about why it was that our particular qualification is getting an increasingly bad name for itself. The common consensus is that the International Baccalaureate, with its six subjects and an extended essay, is a much more rigorous and challenging qualification. September 2008 sees the launch of the Cambridge Pre-U, another qualification that aims to compete against the already tainted brand of the traditional A level (bet that’s the first time you’ve heard that phrase without Labour being in the sentence… 
Oh wait.), and Imperial has just announced its plans to set its own entrance exams, its rector Sir Richard Sykes claiming that “We can’t rely on A levels any more.” In this article I’d like to explore how competition between A level exam boards breeds not excellence, but mediocrity, and I’m going to point the finger at a lesser-blamed culprit: you.
The new milk bag
I am off to my local Sainsbury’s later on this afternoon in search of one of the innovative milk bags developed as a response to demands from consumers for less plastic packaging in the weekly shop. Has anyone out there either bought one of these or made it work? We would love to hear from you! I will report back on the experience when I find a store with one in stock. For the moment, here is Rory Cellan-Jones, the BBC’s technology reporter making a bit of a mess of his first go with the milk bag!
The external costs of food waste
Over 4 million apples and over a million and a half bananas are thrown away in Britain every day. This video from Newsnight is excellent on the external costs of the food we throw away - estimated by some to be worth around £8 billion a year. Should we actively encourage food scavengers? What are the strategies we should be adopting to reduce the amount of food thrown away? This is a good topic to use to teach evaluation skills for AS microeconomics.
Bio-fuel curse and cure
Today marks the introduction of the new EU Renewable Transport Fuel Obligation and there has been a huge amount of coverage about the economic and environmental impact of the switch towards biofuel production.
read more...»Demand for recycled steel
One of the beneficial side effects of the boom in commodity prices is that the economcis of recycling materials has changed. This BBC video clip looks at the booming market for recycled steel, 95% of an old war ship can be used again as it is ripped apart in a shipyard in Belgium.
On the other hand, the soaring price of copper and other metals has seen a rise in theft - this article from the Guardian last week says that up to two dozen people have died in crime related to the stealing of copper in the USA over the last two years: “With copper prices rising from 80 cents a pound five years ago to $4 a pound, the wiring and pipework to be found in transport, buildings and electrical infrastructure is suddenly attractive booty for thieves.” Schools, hospitals and churches have not been immune to the rise of copper stealing - it is all a question of incentives!
Interrelated markets and climate change
An article in The Times recently explored the economic implications of reducing demand for oil and energy in the West.
read more...»Dioxin contamination and illegal dumping of waste
The Independent’s front page this morning offers a classic tale of externalities. For years residents of Campania have been found to be less healthy than residents in the rest of Italy. Mortality rates, particularly from some forms of cancer, are higher in the areas around Naples where the rubbish crisis is at its most severe. Now allegations are surfacing that the illegal dumping of waste in an area where waste management is under the control of the Mafia has caused excessive levels of dioxins to be found in Buffalo milk, one of the prime ingredients of mozzarella cheese beloved of pizza lovers around the world.
“The topping on a billion pizzas, the magic ingredient in a million salads, is at the centre of a major food scare involving pollution, corruption, the Mafia and southern Italy’s remarkable crisis in waste management.” In a separate piece, the Indy reports that “A recent report by Italy’s small business group estimated that the Mafia is the biggest business in Italy, with organised crime netting Mob bosses the equivalent of more than £63bn a year, or 7 per cent of the country’s gross domestic product.”
BBC news: Toxin scare hits mozzarella sales
New York Times: Italy’s Mozzarella Makers Fight Dioxin Scare
What shall we do with the drunken nation? Volumen Dos
[This is the concluding half of my two-parter on combating alcohol abuse in Britain. The first half, focusing on the price policies the government can use can be read here.]
read more...»What shall we do with the drunken nation?
Over the last week I’ve noticed quite a few alcohol-related articles on tutor2u (here and here). To extend the tradition, here’s my take on the subject:
It’s becoming quite clear that alcohol abuse is fast becoming a problem for Britain. Every day we see tabloids headlines screaming “A Nation of Alcoholics”, etc. Okay, perhaps the issue isn’t that bad but we definitely have to do something to curb this binge drinking “epidemic”. Being the pragmatist that I am, I’d like to examine a spectrum of policies the government have at their disposal and their likely consequences.
read more...»Would Increased Taxes on Alcohol Curb Binge Drinking?
There are a number of negative externalities caused by excessive drinking. There are 1.2 million violent incidents each year attributable to alcohol misuse, alcohol related illnesses cost the NHS £1.7 billion per year, and £6.4 billion is lost to business in terms of lost productivity. An article in today’s Telegraph argues that a small increase in the tax on alcohol could save thousands of lives a year.
Click on this link to read the article: Taxes on Alcohol Should be Increasd to Curb Excessive Drinking.
But, is increasing the price of alcohol the best way to curb binge drinking, and internalise the negative externalities? Or should there, as is the case with cigarettes, be labels on the drinks warning of the dangers? Should alcohol advertising be banned? Should bars be prevented from offering ‘happy hour’ promotions? Has extended bar opening hours had any impact? Should more be taught in school on the dangers of excessive drinking?
The Home Secretary, Jacqui Smith is considering giving police power to confiscate alcohol from anyone under the age of 18 carrying it in public:
Should the Police Have Powers to Confiscate Alcohol?
Congested skies
The front page of my Times this morning has a particularly striking picture of an aircraft seemingly about to land on the roof of some unsuspecting person’s three-bedroom semi detached. And contained with the article is a classic example of externalities and costs and benefits. The story is about a proposed reorganisation of holding stacks for aircraft using many of Britain’s busiest airports.
read more...»Shopping Makes You Fat (and it’s bad for the planet too)
The SDC blames the food chain for 20% of greenhouse gas emissions in the UK and for contributing to unhealthy lifestyles.
Professor Tim Lang, the report’s main author, told BBC News: “When we go shopping, I don’t think we really recognise the enormous impact our food is having on the environment. It… has an impact on our health, the energy use, how we get there - everything that matters is actually happening beyond our control, but government’s got to get grip of that.”
read more...»A Licence To Print Money?
An innovative method of internalising the externality of smoking? The introduction of a £10 permit to purchase tobacco products has been proposed in an attempt to increase the cost and inconvenience of buying cigarettes and similar goods.
The ban on smoking in enclosed public spaces which began in England in July 2007 has been touted as a considerable success, contributing to a 7% drop in cigarette sales compared with the year before. But this has not been without unintended consequences, highlighted already on these blog pages. And with approximately one third of imported cigarettes already arriving in the country illegally (at a cost of £2bn per year to the UK Treasury), won’t any attempt to drive up the price of legal tobacco products - and the inconvenience of buying them - simply result in greater demand for smuggled goods?
Perhaps more radical and shocking methods to reduce demand for cigarettes are needed (this link shows some of the campaigns that have been used in various countries.)
Success of the Irish plastic bag tax
Green taxes are frequently criticised for being ineffective in changing behaviour, expensive to operate, inequitable across communities and sometimes a combination of all three. But the tax levied on plastic bags in Ireland five years ago appears to be one of the more enlightened public policy initiatives of recent times. This New York Times feature visits the emerald isle and finds strong public support for the measure and a change in attitudes to piling up the plastic bags when we get to the end of the check-out queue.
Canines or SUVs? Carbon foot (paw) prints
Which do you think takes a bigger toll on the environment, owning a dog, or owning an SUV?
So asks Arnold Kling on his excellent blog and there has been a merry and fasincating discussion on the site ever since. I have never even considered buying a new SUV (my ever-reliable Citroen has done only 20,000 miles in seven years) but I do have an eye on getting a puppy sometime soon and I hadn’t even considered whether I should consider the environmental impact!
As I hurtle through middle age, I am far more likely to spend an hour or two jogging and playing with my dog than I would watching tv; the marginal benefits of canine ownership and companionship are substantial to dog lovers, witness how many of them are prepared to pay huge vets bills to prolong their pets lives.
Kling makes the rather provocative statement ‘I personally have nothing against dogs. But it does seem to me that environmentalism inevitably points toward a policy of extermination of pet dogs. Unless environmentalism is simply hatred of industry.’ - presumably to send dog owning bloggers into a state of apoplexy!
What do you guys think?
Bottled Water - The Eco Cost
I read this article from the Observer whilst on the exercise bike in the gym today - at the same time I was merrily sipping away at one of the plastic cups available ‘on tap’ to gym junkies. It certainly made me think about the environmental costs of our obsession with bottled mineral water and sports drinks
‘Britons still consume 3bn litres of bottled water a year….Most bottled water is siphoned into PET (polyethylene terephthalate) bottles; of 13bn plastic bottles sold in the UK last year, just 3bn were recycled. As recycling rates remain dismally low, making bottles requires virgin materials, namely petroleum feedstocks. It takes 162g of oil and seven litres of water (including power plant cooling water) just to manufacture a one-litre bottle, creating over 100g of greenhouse gas emissions (10 balloons full of CO2) per empty bottle. Extrapolate this for the developed world (2.4m tonnes of plastic are used to bottle water each year) and it represents serious oil use for what is essentially a single-use object. To make the 29bn plastic bottles used annually in the US, the world’s biggest consumer of bottled water, requires more than 17m barrels of oil a year, enough to fuel more than a million cars for a year.’
Time to fill up a sports drink bottle with water from the tap - leave it in the fridge overnight and I am sure it will taste just as good as the water available from the ubquitous water dispensers. is the boom in bottled water sales over? The Grocer magazine reported that sales in the UK in 2007 were well down on the year before and that this was only partly down to the appalling summer weather. Is there a case for government intervention in the market similar to the 5 cents per bottle tax introduced in Chicago?
Unintended consequences of the smoking ban
Any government intervention in the market can give us cause to consider the Law of Unintended Consequences where a policy decision or action leads to fresh actions which might not have been considered by those putting a policy in place. Some of these knock-on effects can be positive, a windfall that enhances the impact of the original decision. Others can be negative leading to fears of government failure and a deepening of an existing problem or market failure. The smoking ban seems to be providing a rich seam of examples of such unintended blow-back effects.
read more...»
