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.