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Definitions:
Please select demand supply private costs external costs negative externalities

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In the News:
Please select externalities market failure

Worksheet on Pollution

Step 1 - The market gets a 'U' - it's failed! Why?

Free markets are the means used in a market economy to allocate resources. Prices go up or down depending on whether resources are plentiful or scarce. Firms supply goods according to how much it costs them to produce the good or service. The higher the cost, the less they will supply.

Show on the diagram below the effect of an increase in the firm's costs. Mark in the equilibrium price and quantity before and after the cost increase.

There are two different types of costs. Most of the costs are private costs. These are costs that the firm has to pay to produce. However, sometimes production also leads to external costs. These are costs that are paid by society, not by the firm. They are often known as negative externalities.

In the table below try to identify each of the costs as private or external costs.

When a firm is producing, will they take account of the external costs? YES / NO?

(Delete as necessary)

Who pays for the external costs? ______________________________________

The true or full cost of production should therefore take account of all costs - both private and external. The effect of this is to shift the supply curve as in the diagram above. Draw a new diagram on the axes below to show:-

• the demand curve
• the supply curve including just private costs
• the supply curve including private and external costs
• the equilibrium price and quantity the firm will produce
• the equilibrium price and quantity that the firm should produce if they account for the external costs

Should the equilibrium price be higher or lower taking account of the external costs? _______________

Should the equilibrium quantity be higher or lower taking account of the external costs? _____________

Why do we therefore consider external costs, where they exist, to be a market failure?

Step 2 - Polluting the atmosphere

Pollution is a external cost. What problems can be caused by pollution?

Will firms take account of this pollution as a cost? YES / NO?

Justify your answer.

Who therefore has to deal with the effects of pollution? __________________________________

Step 3 - Pollution - not in my backyard - surely?

To find out about any chemical emissions there may be in your area, go to the Friends of the Earth site (http://www.foe.co.uk/) and carry out the following steps.

1. Go to the "Factory Watch / Who's polluting your neighbourhood?" section
2. Enter your postcode (alternatively you can find your area from a national map)
3. Click on the red dots nearest to you to find out about local emissions
4. Fill in the results in the table below

Go back to the Friends of the Earth site (http://www.foe.co.uk/) and once again look at the Factory Watch section. This time look at the 'Filthy Factories' section. Find out which are the worst five factories in your area for the emission of a particular chemical (try 'particulates' or 'Nitrogen Oxide'. List the five companies below:

1

2

3

4

5

Step 4 - Help - what can we do?

What policy options are open to the government to deal with pollution?

One way they might choose to try to deal with the problem might be taxation. Show the effect of a tax on the diagram below:-

To ensure the optimum outcome for society, how much must the tax be?

The Kyoto climate conference held recently in Japan tried to get countries to agree to strict limits on polluting gases to try to limit further emissions and halt global warming. The USA were reluctant to agree to these limits and came up with a novel solution. Go to the BBC site (http://news.bbc.co.uk/1/hi/in_depth/sci_tech/2000/climate_change/default.stm) and look at the special section on Global Climate Change.

What is the solution that the USA came up with? How does it work?

Try also searching newspaper articles by using the links below to find out some more about the policies agreed by the Kyoto conference. Fill any information in below.

The Times (http://www.timesonline.co.uk/)

The Financial Times (http://www.ft.com/)

The Daily Telegraph (http://www.telegraph.co.uk/)

N.B. You may have to register for these sites to get access to them. Ask your school / college if they have already registered.