CEL for Teachers’s Updates
Week 2 - When Pricing Fails - Externalities
Week 2 - When Pricing Fails: Externalities
If the invisible hand/ price mechanism works to allocate resources so well, why do we see exorbitant pricing? Wastage? Shortages?
One way to explain this market failure is to understand that whenever people consume or produce, they could be creating Externalities. So what are Externalities? Where do they lurk? Why do they matter?
Smoking is one of the most common example of negative externalities. (Altmann, n.d.)
References
Altmann, G. (n.d.). Cigarettes in ashtray. [Photograph]. Pixaby. Retrieved August 1, 2023, from https://pixabay.com/photos/cigarettes-ashtray-ash-smoking-83571/
Lesson Objective -
1. Explain what externalities are and how they occur.
2. Define key terms: externality/ external costs/ benefits, indirect tax/ pigouvian tax
3. Reflect: What are the consequences of not paying the true price on goods and services we consume? (Personal Update 2 - 200 words, use terms and concepts learned)
4. Comment on 2 Peers' Updates (75 words using terms and ideas learned)
Pre-Session Material (please complete before synchronous sessions)
Take notes and type your wonderings at the end of this pre-session below.
What are the reasons for pricing to fail?
(Marginal Revolution University, 2015)
How are externatlieis usually corrected? Under what circumstances do they work?
(DW News, 2023)
References
DW News. (2023). Indonesia considers sugar tax to tackle diabetes and obesity [Video]. In YouTube. https://www.youtube.com/watch?v=XxsS2MhAnEo
Marginal Revolution University. (2015). An introduction to externalities [Video]. In YouTube. https://www.youtube.com/watch?v=CpVf11f09Pk&list=PL-uRhZ_p-BM5C7RsahR48iVyIG95WFhLl
Comment: What new insights did you gain about an economic decision you made this past week? What is one wondering you have as a result of this week's learning?
One more wondering. Once the medical/health impact of bioplastics and Co2 on humans is further determined will governments be driven to curtail and tax the use of plastic like they have cigarettes? Why haven't taxes been introduced anywhere yet ?
I've always wanted to understand how countries operate as businesses and so it was enlightening to see how cigarette tax revenue is used. This explains why vapes were banned in China. I wonder what tax revenue they generate off cigarettes, if any, or how it impacts the GDP. I don't really have any insights into economic decisions I made this past week. I'd like to learn more about inflation and where that fits into the grander scheme of things.
In my short trip to Dunhuang, I found that the private cost not cover the externalities. The reason I say this is that Dunhuang, being a water-scarce city, the costs for tourists' water consumption in their daily living were not included in their travel expenses. Although the government has implemented Pigouvian Tax, such as limiting the number of flights and setting daily maximum number for entrance tickets, these do not seem to be effective methods for reduce the externalities.
One externalities pertaining to myself would be eating out versus cooking food. Convenience foods can be processed and fried compared to healthier food that you made. Knowing the ingredients that you used and how it was prepared. Some healthier convenience foods are healthier than others but still a question of “healthy” consumption. Eating out leads to overspending? The private cost as a consumer that I pay for food grown that is organic against mass produced food that has been treated with pesticides and insectisides. Damaging nature therefore producing external costs.
Considering the importance of integrating social cost analyses into economic decision-making, we must recognize the necessity for mandatory evaluations of social costs in all future production processes and investments. Such an approach would ensure that decision-makers fully acknowledge the broader impacts of their actions on society, including environmental degradation, health implications, and social inequities. Without a comprehensive understanding of these social costs, consumers and policymakers are handicapped in making informed choices. They need a proper awareness of the consequences tied to the consumption of goods and services, potentially exacerbating issues like resource depletion and social disparity.
To effectively incorporate social cost into business practices, robust mechanisms must incentivize companies to recognize and mitigate negative impacts. This could involve regulatory frameworks that require disclosure of social cost assessments, as well as economic incentives such as tax benefits or subsidies for businesses that demonstrate sustainable practices.
I can't find your post relating to the water shortage in Cape Town - such a good example. They say that the next world war will be over water. Analysing this micro example would be fascinating to unpack at a macro and global level.
Why haven't cigarettes been priced out of the market, taxed to the point where people no longer smoke. Why are cigarettes still affordable?
Agreed ... smoke them out so to speak and make it so difficult to buy that it becomes more of an inconvenience than a soothing habit to stress.
@Joanne Anderson Interestingly, according to Blecher E, van Walbeek C. An Analysis of Cigarette Affordability, there is a growing dichotomy, where cigarettes are becoming less affordable in more developed countries and a lot more affordable in developing countries. This will only increase the negative externalities on more fragile and challenged economies!
When the market fails, adjust the price. This will affect buying behaviour too. I don't like how tax is introduced. It's another mechanism with which to control the supply and demand curve and spending habits without considering buying power and needs then seem to fall by the way side. How many market models are there? If social surplus is afforded by the cost to bystanders how is the cost to bystanders calculated? I wonder how social surplus can be used more constructively rather than introducing taxes. Is market failure purely failing to adhere to a model ? Are 'market failures' ever used as opportunities?
In the second video, the interviewee has not really answered directly to one of the question I am mots interest in, How would you respond to manufacturers argument that 'this might just be another tax on the group that can least afford to pay it'?
She mentioned lots of evidence/studies, showing benefits of the implemented policies....I guess we are going back to the question of the most vulnerable group, but if the change of policy can change the habit/amount of sugar consumed by the community, then there is a benefit to this pigouvian tax?
Appreciate the questions asked and I would like to pursue this avenue more... Is any tax really beneficial especially when cost of living, inflation and taxes go up but salaries stay the same...
Being a responsible citizen it is important to consider external costs from your consumption (based on private value) decision. Obviously all the negative externalities can not be absorbed by the producer / individual , but, if addressed correctly they can be considerably reduced. Accumulated over time the externalities pose a significant threat to the well-being of people. If the question of negative externalities had been posed decades ago whether the current ecological and environmental crisis we are facing today could have been reduced as the result? My question is how government consider the externalities when agreeing on certain policies? Are there areas of government intervention that are concerned with negative externalities more than the others? It would be interesting to see the true reasoning and how useful this economic theory is outside the classroom. Again using the price incentive (such as Pigouvian tax, for example) seems the most effective tool to influence the producers decisions and decreasing the DWL for society.