Posts tagged externality

California’s Tradable Permit on Oil Refineries

Californian Government Implements Tradable Permit on Oil Production

The Reporter: News Article

According to The Reporter, California decided to implement the tradable permit policy for the production of oil, which is responsible for the global warming. The government has budget deficit of “$9 billion” and it hopes to gain “$14 billion” by 2015, profiting from auctioning tradable permits to the oil companies.

The main reason for implementing tradable permit policy is that there is a negative externality associated with the production of oil. The social cost exceeds the private cost and this makes the society to take care of the environmental cost. In order to internalize the cost of pollution of the oil production and move the quantity supplied from Q market to Q optimum, the Californian government introduced tradable permit.

The government or EPA sets the amount of pollution allowed and auctions the pollution rights (tradable permits) to the oil companies. If the amount of tradable permit is appropriately chosen, it effectively moves the quantity supplied to Q optimum both eliminating the negative externality and increasing the government profit. The government would profit P times Q optimum amount of money.

However, some critics argue that the increase in the price of oil will increase the overall price of consumer goods. The cost of production will increase for virtually all the consumer goods that are produced from oil-running factories. Also, the means of transporting goods from city to city will be more expensive. All this will contribute in increasing the price of consumer goods. The economic size (or social welfare) would decrease also.

The overall increase in the price of oil and the price of consumer goods will lead to the decrease in the consumer spending overall. United States, especially California, is a place where the public transportation is not as advanced and popularly used as Korea. People usually drive their cars to go to work and go shopping. The increase in the price of oil will act as a disincentive for the people to go out on shopping. This will shift the demand curve from Demand 1 to Demand 2 decreasing the price of consumer goods from P2 to P1 and decreasing the quantity demanded from Q1 to Q2. Again, the economic size (or social welfare) will decrease. Some argue that the tax revenue form the taxes such as VAT will decrease countering the benefits by profits from implementing tradable permits.

In conclusion, the tradable permit will increase the profit of Californian government and at the same time cut down the level of pollution contributing to the global warming. However, the government should be fully aware of the complicated consequence or unintended effects of implementing any sort of policy distorting the market will have.

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Japan’s Victory Against Bluefin Tuna Ban – Negative Externality

Yahoo News: Click Here

Al Jazeera English: Click Here

Financial Times: Click Here

According to Yahoo News, Japanese fish dealers on Friday welcomed the rejection of a proposed trade ban on Atlantic bluefin tuna — a prized ingredient of sushi — while urging that existing quotas be more strictly enforced to protect the species from overfishing.

When I saw the news on NHK, the Japanese national television channel, it reported how Japanese people sighed with relief.

Japan consumes about 80% of bluefin tunas caught in the world, and this has created the problem of possibility of extinction of bluefin tuna. In fact, according to Financial Times,  scientists estimated that bluefin stocks have fallen by 75 per cent since the 1950s. Large fish now sell for tens of thousands of dollars.

Japan’s consumption of bluefin tuna had the negative externality of decrease in the number of bluefin tuna and the possible extinction of the tuna. This will be explained a lot better if you loot at a diagram.

As you see the Diagram, Japanese consumption of bluefin tuna is creating a negative externality of decrease in the number of the species and possible extinction of the species. The current consumption curve is on MPB which should be on MSB that reflects these negative externalities. Point(Q*,P*) is the optimum point where it is considered appropriate for the price and the quantity consumed for the bluefin tuna. The US and the European countries tried to ban the consumption of bluefin tuna in order to overcome this negative externality, but they were defeated by Japanese lobbyists and many bluefin tuna fans.

Personally, I am a great fan of tuna and sushi so I was grateful for what Japanese have done. But, I wasn’t that happy because I realized that there were these kinds of negative externalities associated with my lovely consumption of tunas 😦 I think that Japanese should increase the number of bluefin tunas by making a tuna farm. That way, it’ll increase the quantity the supply of tunas and decrease the price of it making it happy for the consumers like me 🙂 I’ve heard that it is hard to ‘cultivate’ or raise these big fish in a isolated pools, but I hope that Japanese fishery industries develop a way to ‘cultivate’ (I don’t know other apt vocabulary to replace this) them.

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Data Response: Trees

What are the external costs/benefits of trees?

(a) (i) Negative externality are the bad effects that are suffered by a third party when a good or service is produced or consumed.

(ii) Positive externalities are beneficial effects that are enjoyed by a third party when a good or service is produced or consumed.

(b) Graph 1: Negative Externality of Tree Branch

Branches falling in a neighbor’s yard could be considered a negative externality looking at several points. If branches from trees fall in a neighbor’s yard, the neighbor would have to take his/her time to clean the branches up. Many business people think of time as money. The time the neighbor has to take to clean up the branches could be converted to a monetary value. Also, the ‘labor’ of cleaning up the branches also could be converted to a monetary value. In addition, if a neighbor suffered psycologically by the constant falling of branches from his/her neighbor tree can be conpensated by money. However, many ‘modest’ or ‘ordinary’ neighbors would not complain about it fearing the relationship with his/her neighbor could get bad. As it is illustrated in the graph, the time, labor, and psycological suffering of falling branches is not reflected in the graph. So this falling of branches from the nieghbor’s tree could be considered a negative externality.

(c) Graph 2: Government Intervention to Stop Negative Externality

Government could intervene if a neighbor complains to the local authorities about this annoying branches. A government could put a tax on a neighbor’s tree for having these ‘significant’ negative externalities and put a curve of MPC up to MSC in the graph 1. Or, the government could persuade the neighbor to cut down trees or clean up the branches him/herself and move the curve of MPB down to MSB in graph 2.

(d) If a government taxes on the neighbor for the falling of branches, it eventually lower the number of branches falling on the poor neighbor’s garden, however there are some drawbacks. The neighbor getting taxed would have monetary loss for his/her tree’s wrongful acts. To explain this graphically, in the graph 1, the number of branches falling decreases, however, cost of branches falling increases. Therefore, it is hurting the neighbor of the wrongful tree. However, if the government persuades the person to either cut down trees or clean up the branches him/herself, it will both let both neighbors to benefit. The owner of the tree can still keep the tree and the neighbor would not have to suffer from the branches falling of the tree. As illustrated in graph 2, it both lowers the cost and quantity of falling branches. So the best way for the government to do is to persuade the owener of the tree to clean up the branches falling off from the trees.

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Data Response: Clean Coal

(a) (i) Negative externality occurs when the production or the consumption of a product creates external cost to the society. For example, consumption of cigarettes can result in high possibility of cancer and air pollution.

(ii) Welfare loss occurs when there is a negative externality in the market. There is a loss of welfare when this negative externality is not reflected in the price mechanism.

(b) Graph 1:

Coal fired power stations produce negative externalities such as air pollution and acid rain. As you see in the graph, external costs of air pollution and acid rain are not reflected on the price. The production of electricity by usage of coal should be on the curve MSC, which rightfully reflects the negative externalities of the production. Instead, the curve is on MPC, which does not reflect the negative externaltities. Therefore, this engenders the welfare loss which is colored black in the middle of the graph.

(c) Graph 2:

In order to solve this problem, the government must intervene to overcome this market failure. The best solution to overcome this problem is for the demand for such polluting energy to go down. As you see in the graph 2, as demand goes down, the product becomes much cheaper and the consumption lowers down lessening the negative externalities of air pollution. The government could advertise not to excessively use the energy produced by the coal. However, this sometimes this method would not work. If this method does not work, government should use the last method of taxation on the production of the electricity by coal. This method is less-desirable than the first method. Although the consumption goes down, the price for the electricity goes up. So this would hurt the consumers.

(d) If the government taxes on the power stations producing electricity by coal, it will raise the price up from P1 to P* in the graph 1. This method will hurt the consumers. However, if the government tries to persuade the consumers to lower their consumption of electricity by advertisement, it will both lower the price of the electricity and the consumption. The best way for the government is to persuade the consumers not to consume electricity too much. The method of taxation should be considered as a last resort.

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Disadvantages of Private Health Care

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1. Inequality

People who are low in income will have greater burden of medical fees than those with high income. Also, people with high income usually have medical insurance covered by their employing company. But, people with low income usually don’t have a medical insurance covered by their employers.

Children, students, or those with no jobs will not have a medical insurance. Some companies cover medical insurance for the employee’s children, however, majority of companies simple do not because of its expensive cost. So, children or student are vulnerable to injuries or disease as the medical fee will be so expensive for them.

2. Health Care is is a Merit Good and it has positive externalities.

Health care is indeed a merit good. However, in a country with many privatized hospitals, the consumption or usage of medical service is lower than the optimum consumption. So medical market fails due to under-consumption of medical services. So governments should intervene and support the health care.

Also, many people know that health care creates some positive externalities. A good medical system can contribute to a successful economy. An economy will be improved by people being treated quickly/efficiently which will help the improvement of labor productivity. In free-market system, this positive externality is ignored and therefore the health care market fails.

3. It is expensive.

Private hospitals do have motives to make profit out of medical services. You can quote on Adam Smith that all human beings are motivated by private profits. So, usually privatized hospitals charge its patients higher than government-owned hospitals. It is because the medical fee is not supported by the government. Also, they must have marginal profit so they would have raise the medial fee.

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The Great Pacific Garbage Patch – Negative Externalty of Industrial Society

Digital Journal: Click Here

According to the video, there is a massive garbage patch double the size of Texas floating around the Pacific Ocean polluting/killing the marine life that inhabits the ocean. 80% of the garbages that consist of this massive ‘garbage island’ are plastic, which are said to be 100% non-biodegradable.

This is another great example of negative externality along with Global Warming. These trash actually accumulated since the 1940’s when plastic became the common means of manufacturing goods.

At the time, people did not know that plastics can last thousands of years and cause environmental problems. So, the price for the products made out of plastic did not reflect the environmental cost to the society. As a result, this Great Pacific Garbage Patch is roving around the ocean  contaminating the marine life and causing much more problems.

Picture by Wikimedia Commons

In conclusion, markets should now recognize these hidden negative externalities and reflect them on the prices. This could be said to be a environmental problem, however, it is also economical (or rather financial) problem. It’ll take trillions of dollars to completely clean these garbages polluting the Pacific Ocean. I bet no government will be willing to pay for this clean-up. It is time international organizations such as United Nations to take action and force its members to tax on polluting firms and subsidize the firms developing environment-friendly technology.

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Externalities in Real Life

Global Warming is an example of negative externality.

BBC News: Noise pollution on the increase

BBC News: Schoolies week in Australia causes binge drinking worry

Externalities are costs (negative externalities) or benefits (positive externalities), which are not reflected in free market prices. For example, as a result of manufacturing of products, the CO2 levels in the atmosphere increase and therefore results in global warming. So global warming is an negative externality.

In the class, we have looked at the videos about real life externalities. In the videos above in the links, they reported the negative externalities caused by noice pollution and binge drinking.

In the first video, some teenagers were having a party at the house where the sound-proof system was poorly installed. As a result of this boisterous party, neighbors had to suffer a noise pollution. This is one of the negative externalities. The another is that the policemen had to go to the reporter’s house to find out what the problem is and go to problem-making teenager’s house for warning. Boisterous party of teenagers had negative externalities of upset neighbors and the time of the policemen. Some might say that it is policemen’s job to solve these kinds of problems, however, in the video over 300% of calls to police office increased because of the noise pollution. So, it has cost policemen’s time to solve other problems. So the policemen would not have time to stop other crimes from happening. Overall, teen’s noisy party has cost the society a lot, more than their upset neighbors.

In the second video, it reported that teenagers binge drank after their examination as a ceremony. Teenagers were having fun, however, it has cost the society some negative externalities. For example, policemen and volunteers were patrolled in order to prevent some teens from alcoholic poisoning. It has cost policemen’s and volunteer’s time and energy in keeping eye on these teens. Also, the teens probably littered and did not pick up the trash at the beach. This would also cost the local government money for employing people to clean the mess.

In sum, there are many externalities to what we do. This is not limited to economic transaction. There could be externalities from anything we do. In my opinion about the teenager’s binge drinking, the government should just give disadvantages to the teenagers for drinking. For example, if a student gets caught drinking, he/she can be sent to do 30 hours of service hours in alcoholic addiction support center as a punishment.

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