Threshold Network Exercise: should the Third World limit pollution?
1
Scenario
In less-developed countries there are fewer controls on aspects of pollution
such as exhaust fumes.
How would you assess whether such countries, from their viewpoint,
should invoke legislation to improve the environment in such respects?
In doing this you should:
(1) Consider an economic framework or model that you think is going to be
useful. Draw an appropriate diagram.
(2) Identify three important economic concepts from the list below you would
use in answering this question and explain why they are important in this
context.
Partial equilibrium
Opportunity cost
Welfare economics
Social costs and benefits
Elasticity
Monopoly
Multiplier
Externalities
Withdrawals
Taxes
Average returns or benefits
Economies of scale
(In the list there are concepts that are irrelevant and concepts that are useful. Some are
arguably more useful than others. Although there are some ‘wrong’ answers there is not just
one ‘correct’ one. Our feedback highlights our choice of three concepts but you will find we
use others on this list as well. In making your choice try to discard the irrelevant and consider
what you think is the most important amongst the others and why.)
feedback page 2
Copyright: Embedding Threshold Concepts Project
13/08/06
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Threshold Network Exercise: should the Third World limit pollution?
2
Feedback
First we need to consider what economic models are going to be useful to
analyse this question. We often depict economic models by a diagram.
An important concern of welfare economics is how much of different goods
to produce (what is called allocative efficiency). We start by considering the
situation without government controls. The market mechanism (through
demand and supply) determines price and output. Under many restrictive
assumptions we can show that this gives outputs of different types of goods
that maximises the net benefit (i.e. benefits – cost). This is because:
* the demand curve shows the gain to an individual from consuming an extra
unit of the good (the basic argument being that if it was not worth it to them
they will not buy it) – known as the marginal benefit.
* the supply curve shows the marginal cost (the argument being that firms will
only produce an extra unit of output if they at least cover the costs of
producing it (remember costs here include things like a reasonable return to
shareholders).
However, in considering problems such as pollution we recognise that some
of the restrictive assumptions mentioned above are broken. In particular, we
have to consider ‘third party’ effects, or externalities, which are not taken into
account by private agents. These are effects on people who are not directly
concerned with the production or consumption of the good. Here there are
going to be important externalities, for instance people’s health may be
affected by the pollution. This means we need to distinguish between the
marginal private and social costs and benefits. With pollution the marginal
social costs of production are higher than the marginal private costs as
illustrated on the diagram below.
Price
Marginal Benefit
Marginal Cost
S +externalities
(= marginal social cost)
S (= marginal
private cost)
P2
P1
D = marginal
private and
social benefit
Q2
Q1
Quantity
Copyright: Embedding Threshold Concepts Project
13/08/06
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Threshold Network Exercise: should the Third World limit pollution?
3
Let us now apply this to the question:
In the diagram, the optimal output, having taken account of the pollution
caused by the production, is Q2. This is lower than the free market output of
Q1and suggests that there is a case for third world governments to limit
pollution and legislation is one method of achieving this.
However, the model does NOT suggest that such countries should get rid of all
pollution. Importantly, to reduce the pollution means reducing production
(by increasing costs) and in less-developed countries the opportunity cost of
restricting pollution may be seen as very high. For instance, the production
may be helping to reduce the number of people who are below the poverty
line, or gives basic access to electricity to households. This means if
governments act too strongly with anti-pollution measures they may be
reducing social welfare rather than increasing it.
We have highlighted important concepts from the list in the above
explanation. It is possible to choose several of the concepts listed. However,
the following are not important: partial equilibrium, elasticity, monopoly,
taxes, multiplier, withdrawals, average returns or benefits and economies of
scale.
:
Reflection
1.
Did you identify that the marginal, rather than the
average, was important here?
2.
Do you understand why certain concepts were
irrelevant?
3.
Having completed this exercise, do you understand
why countries in the developed world may want
third world counties to restrict pollution by more than
these countries want to themselves?
Yes
Partly No
If your answer is ‘No’ or ‘Partly’ to any of the above, which of the following do
you now intend to do to improve your understanding?
1. Ask for guidance from my tutor.
2. Read a relevant section in a textbook.
3. Work though some example questions.
Copyright: Embedding Threshold Concepts Project
13/08/06
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Threshold Network Exercise: should the Third World limit pollution?
4
Notes for lecturers
Objectives of the exercise and prerequisites
The threshold network exercises are designed to help students recognise the
importance of economic concepts and modelling. They are concerned with
how economics uses a range of concepts (in a connected web) in answering
applied questions and getting students to recognise which concepts are
important and how they relate to each other in the specific context.
Learning Focus: Developing understanding of welfare economics, in
particular externalities.
Threshold Concepts pivotal to this learning are welfare economics,
marginality, and opportunity cost.
Prior Knowledge Required
Some prior knowledge of the market mechanism and externalities is
useful (though it would be possible in a teaching situation to use the
scenario to generate discussion in order to introduce the ideas).
Timing
We would suggest that this exercise is likely to take students around 15-20
minutes to complete. It may be undertaken individually or in groups. This
timing does not allow for any presentation by students of their findings.
Copyright: Embedding Threshold Concepts Project
13/08/06
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.