public economy final assignment topic externalities and its impact on chinas environmental issue

When an externality occurs, either marginal cost or private benefit does not agree with marginal benefit or marginal social cost.. a Negative production externalitiesWhen a firm’s produc

ACADEMY OF JOURNALISM AND COMMUNICATION FACULTY OF POLITICAL ECONOMICS

&v&

PUBLIC ECONOMY

-Final

assignment-Topic:

EXTERNALITIES AND ITS IMPACT ON CHINA’S

ENVIRONMENTAL ISSUE

Student : Vu Mai Chinh

Class : Economics and Management (High-quality K39 cohort)

Student code : 1955280005

Hanoi, 2022

INTRODUCTION 3

CONTENT 4

Chapter I Externality theory 4

1 Definition externality 4

2 Type of externalities 4

2.1 Positive externalities 4

2.2 Negative externalities 5

Chapter II Analytics of Economic Growth and Pollution Emission in China 12

1 Overview of China’s pollution problems 12

2 Effects of air pollution on china’s population 14

3 China’s approach to its air pollution problems 14

4 Other environmental challenges for China 15

 Water insecurity 15

 Desertification 16

 Soil pollution 16

 Nuclear waste 16

5 Measures of China to reduce polluted environmental 16

Chapter III Several recommendations 18

CONCLUSION 18

Reference 19

The public economy plays an extremely important role in the economic development of every country The study of the interrelationships between the environment and the economy is extremely urgent for managers in social governments in general and businesses in particular to be able to issue policies and implement activities

In the process of forming and developing a sustainable economy, surely in all their activities, humans always have certain effects on natural resources, even being a factor causing pollution severe environment Therefore, externalities are a matter of urgency for scientists to be able to analyze and come up with optimal solutions, in line with today's actual market

The increasingly developed society leads to an increasingly vibrant and diverse market That has arisen strong competition from businesses to expand the market size In order to reduce costs in the race for profit, many businesses have violated environmental regulations, illegally discharging waste into the natural environment without any proper treatment

China has suffered severe ecological destruction and serious environmental problems which threaten both its economy and the health of its people Apart from air and water pollution, unprecedented growth in household and industrial waste, loss of biodiversity, felling of rain rainforests and overfishing has occurred On a global level, China’s air pollution levels have contributed substantially to the negative effects of climate change This research will explore the theory of externalities and apply it to analyse the effects of externalities on the Chinese environment

CONTENT Chapter I Externality theory

1 Definition externality

An externality is a case of market inefficiency that requires government intervention It can be said that when the actions of one entity have a direct effect on the welfare of another, but those effects are not reflected in market prices, such effects are called externalities Externalities can be either negative or positive

They can be caused by both production and consumption activities

- In externalities, who is causing harm (or benefit) to whom is often only relative

The distinction between positive and negative properties of externalities is relative -Same externality, but it is judged as good or bad depending on the point of view of those affected

- All externalities are inefficient, from a social point of view When an externality occurs, either marginal cost or private benefit does not agree with marginal benefit or marginal social cost Therefore, the market optimal level of production is also different from the socially efficient level

2 Type of externalities

2.1 Positive externalities

a) Positive production externalities

When a firm’s production increases the well-being of others but the firm is not compensated by those others For instance, Example: Beehives of honey producers have a positive impact on pollination and agricultural output

b) Positive consumption externalities

a) Negative production externalities

When a firm’s production reduces the well-being of others who are not compensated by the firm

An external cost, such as the cost of pollution from industrial production, makes the marginal social cost (MSC) curve higher than the private marginal cost (MPC)

The socially efficient output is where MSC = MSB, at Q1, which is a lower output than the market equilibrium output, at Q

Net welfare loss can exist in two situations Firstly, it exists when the marginal cost to society of a particular economic activity, such as manufacturing 200,000 computers, is greater than the marginal benefit to society Secondly, it can exist when the marginal

the marginal cost The first situation can occur when the market produces ‘too much’, and the second when it produces ‘too little’

For example, If we consider a manufacturer of computers which emits pollutants into the atmosphere, the free market equilibrium will occur when marginal private benefit = marginal private costs, at output Q and price P The market equilibrium is at point A However, if we add external costs, the socially efficient output is Q1, at point B

At Q marginal social costs (at C) are greater than marginal social benefits (at A) so there is

a net loss For example, if the marginal social benefit at A is £5m, and the marginal social cost at C is £10m, then the net welfare loss of this output is £10m – £5m = £5m In fact, any output between Q1 and Q creates a net welfare loss, and the area for all the welfare loss is the area ABC

Therefore, in terms of welfare, markets over-produce goods that generate external costs b) Negative consumption externalities

When certain goods are consumed, such as demerit goods, negative effects can arise on third parties Common example include cigarette smoking, which can create passive smoking, drinking excessive alcohol, which can spoil a night out for others, and noise pollution

the benefit to their neighbours of owning the house and living in it.

Another important example of a negative consumption externality if that of road congestion As individuals ‘consume’ road-space they reduce available road-space and deny this space to others

c) Private-sector solutions to negative externalities: coase theorem

 Internalizing the externality:

When either private negotiations or government action lead the price to the party to fully reflect the external costs or benefits of that party’s actions

Consider, for instance, any community, whether a group of neighboring houses or a set of apartments in the same or neighboring buildings The quality of life in the neighborhood is affected by how each household maintains its property If people plant flowers, they confer

a positive externality; if they let their houses run down, they confer a negative externality

Even when each family owns its own apartment, the households may collectively decide

that maintenance of the facilities that affect them all—including the external appearance— should be undertaken collectively They form a cooperative or a condominium association There must be, of course, some way of enforcing the collective agree- ment that those who purchase a condominium or an apartment in a coop- erative sign A member of the condominium association might prefer to be a free rider, not paying his or her share of the cost of the maintenance of the common facilities; or the member might refuse to maintain his or her apartment in ways that are collectively agreed upon, and that may

adversely affect neighboring apartments There must be recourse to the legal system, which ensures that the terms of the agreement—by which those living near each other attempt to deal with some of the externalities they impose on each other and to provide what are “public goods” to the group—are adhered to

 Coach theorem

Coase Theorem (Part I): When there are well-defined property rights and costless

bargaining, then negotiations between the party creating the externality and the party affected by the externality can bring about the socially optimal market quantity

Coase Theorem (Part II): The efficient quantity for a good producing an externality does

not depend on which party is assigned the property rights, as long as someone is assigned those rights

In practice, the Coase theorem is unlikely to solve many of the types of externalities that cause market failures

 The assignment problem:

In cases where externalities affect many agents (e.g global warming), assigning property rights is difficult

⇒ Coasian solutions are likely to be more effective for small, localized externalities than for larger, more global externalities involving large number of people and firms

 The holdout problem

Shared ownership of property rights gives each owner power over all the others (because joint owners have to all agree to the Coasian solution)

 Transaction Costs and Negotiating Problems:

The Coasian approach ignores the fundamental problem that it is hard to negotiate when there are large numbers of individuals on one or both sides of the negotiation

This problem is amplified for an externality such as global warming, where the potentially divergent interests of billions of parties on one side must be somehow aggregated for a negotiation

d) Public sector solution to externalities

 Market-based solutions

Fine and taxes - The simplest form of market-based solution involves levying fees or

taxes in proportion to the amount of pollution emitted In general, whenever there is an externality, there is a differ- ence between the social cost and the private cost, and between the social benefit and private benefit A properly calculated fine or tax presents the individual or firm with the true social costs and benefits of its actions Fines of this sort— designed to make marginal private costs equal mar- ginal social costs, and marginal private benefits equal to marginal social benefits—are called corrective taxes, or sometimes Pigouvian taxes, after A C Pigou, a great English economist of the first half

of the twentieth century

Subsidizing pollution abatement: Because a firm is likely to receive a negligible direct

benefit from pollution abatement (most of the benefits accruing to those who live in the vicinity of the plant), absent a fine on pollution, it has little incentive to spend money on pollution abatement There is, from a social point of view, too little expenditure on pollution abatement Rather than taxing pollution, the government could subsidize pollution abatement expenditures By providing a sub- sidy equal to the difference between the marginal social benefit of pollu- tion abatement and the firm’s marginal private benefit, the efficient level of pollution abatement expenditures can be attained

profits are higher under the former system than under the latter The distributional consequences are not limited to the pollut- ing firms and their shareholders Because output will be smaller under the system of fines, prices will be higher, and consumers of the polluting firm’s products will be worse off On the other hand, those who have to pay the taxes to finance the subsidies for pollution abatement are clearly better off under the system of fines It should be emphasized, however, that the choice between subsidies and fines is not just a distribution issue As we have seen, under the pollution abatement subsidy scheme, producers do not face the true social cost of their production; there is an inefficiency By contrast, with an appropriately designed system of fines, producers do face the true social costs

Marketable permits:

An increasingly popular market-based solu- tion involves marketable permits,

commonly referred to as tradable per- mits, which operate under a cap and trade system.

A limit, or cap, is placed on the total amount of a pollutant that may be emitted, and this limit is either allocated or sold to firms in the form of emissions permits These limit the amount of pollution that any single firm may emit For instance, each firm may be allowed

to emit 90 percent of the amount it emitted the previous year Thus, a firm is granted a permit to emit so many units of pollutants Because what the government cares about is the total amount of emission reduction, it allows firms to trade permits A company that cuts its emissions in half could sell some of its permits to another com- pany that wants to expand production (and hence increase its emission of pollutants)

Under this system, firms will be willing to sell permits as long as the market price of the permit is greater than the marginal cost of reducing pollution, and firms will be willing to buy permits as long as the marginal cost of reducing pollution is greater than the market price of the permit

 Regulation

Economists have usually argued that market-based solutions provide the most promise for curbing environmental externalities, but government traditionally has relied on direct regulation It has set emission standards for automobiles; put forth detailed regulations relating to the disposal of toxic chemicals; outlawed smoking on domestic airline flights; imposed laws requiring oil companies with wells in the same oil pool to unitize their production; imposed restrictions on fishing and hunting to reduce the inefficiencies

the myriad forms that regulation may take

Advocates of regulations argue that they provide greater certainty: if firms are prohibited from emitting more than a given level of pollution into the water, then one knows the maximum level of pollution; with fines, the level of pollution depends on the costs of reducing the pollution level However, advocates of fines argue that one can easily adjust fines to induce firms to lower pollution to the desired level Moreover, marketable permits provide a market-based way to attain efficient pollution reduction

When feasible, it is preferable to focus on performance, either for reg- ulations or for market-based mechanisms The one argument for focusing on inputs and practices is that they may be more easily monitored Thus, it may be difficult to measure the amount of pollution coming out of a smoke- stack, but it is certain that if scrubbers (devices that reduce the amount of sulfur being emitted by a coal-burning electric power plant) are used, the amount being emitted will be less than if scrubbers are not used

Although there may be good reasons for these policies, in some cases, politics rather than policy has dominated the decision In the case of coal, had a performance-based standard been used, eastern coal produc- ers would have been disadvantaged relative to western coal producers, because eastern coal contains more sulfur To attain the same level of sul-fur, firms using eastern coal would have had to use scrubbers, whereas those using western coal would not Eastern coal producers successfully lobbied for the universal imposition of the requirement to use scrubbers

 Innovation

In some cases, rather than inducing innovation, stringent regulations have induced liti-gation: it may appear cheaper to a firm to try to persuade a court that the regulation is unreasonable than to spend the money to meet the standards imposed by the regulation In some cases, firms have played a game of chicken, gambling that if they fail to meet the standards, the government will not shut them down, for fear of a political backlash from workers who are put out of a job In some cases, however, industry unity has been broken

by an innovative firm that showed that the standards are indeed attainable, or can even be surpassed For instance, the great commer- cial success of the Toyota Prius has spurred its American competitors to develop hybrid cars of their own to compete in a rapidly growing market

Environmentalists who doubt the effectiveness of market incen- tives by themselves in inducing innovation often point to the large gap between best practices—which often seem