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Externalities

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Externalities Worksheet

A printable version of this worksheet is available for classroom or personal use with spaces to fill in the answers.

Introduction

The production and consumption of goods and services often result in people other than the direct consumer and producer of the good or service being affected. The so-called spillover effects are called externalities and involve an external cost or benefit. In Zambia the production of copper, agricultural goods, electricity and ivory and rhino horn all involve considerable externalities. This worksheet will highlight these and make students consider some of the possible solutions.

Step 1

Read the section on the theory of externalities in the Copper Tour. There are several types of externalities:

• Producer on producer
• Producer on consumer
• Consumer on consumer
• Consumer on producer

1. For each type think of two examples of externalities from your own country, one negative, and one positive.

Review the following sections and then try the questions below:

• The environmental impact of the production of copper
• The impact of farming on the environment
• Poaching in Luangwe

2. Identify the negative externalities that occur in the production of copper, maize and ivory.

Step 2

The World Bank provided funding for the building of the Kariba Dam across the Zambezi River. If the economy of Zambia was to experience economic growth it needed to have energy to fuel the growth. Undoubtedly the dam has resulted in the production of large quantities of energy. However, the wider impact of the building on the communities and natural history has been significant.

Review the following sections on the Aid Tour:

• External costs of building Kariba Dam
• External benefits of building Kariba Dam

1. Imagine that you could turn the clock back to 1950. Produce two brief speeches:

(i) Arguing for the building of the dam

(ii) Arguing against the building of the dam

Step 3

Consider the market for electricity in Zambia.

1. Draw the supply and demand diagram for the electricity market in Zambia.

2. Assuming no positive externalities from the production of electricity show how you would amend the diagram to take into account the negative externalities arising from the building of the dam.

3. Assuming that electricity is being produced in a free market what is the impact of the negative externalities on the socially optimum level of price and output?

4. Why do you think these negative externalities were not taken into account during the 1950s when the authorities were making the decision to build?

Step 4

1. As we saw in Step 2 above copper production results in a number of negative externalities. Why does the government need to get involved in introducing policies for the reduction of these negative externalities?

2. What policies could the government introduce to reduce the extent of negative externalities in the production of copper? Why have these not been introduced so far?

3. To what extent do you think that the privatisation of copper production will reduce the negative externalities?

4. Can you suggest possible strategies that the governments could introduce to reduce the level of externalities involved in the following production methods?

Step 5

Review the section on sustainability and then try the questions below.

1. Imagine you are a politician representing one of the following approaches to sustainability. Prepare a short speech supporting your approach and criticising the others.

• The free market approach
• The social efficiency approach
• The conservationist approach
• The Gaia approach

2. Now choose a different one of the four approaches to sustainability and prepare a short speech supporting your approach and criticising the others.

• The free market approach
• The social efficiency approach
• The conservationist approach
• The Gaia approach