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Economics of Externalities in Construction Sector Explained

Learn about external costs & benefits in construction, property rights, Coase Theorem, governmental role, & impact on housing values, using theory of externalities.

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Economics of Externalities in Construction Sector Explained

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  1. UNIT 8 : ECONOMICS OF THE ENVIRONMENT

  2. UNIT 8: ECONOMICS OF THE ENVIRONMENT • Learning Objectives • Distinguish between external costs and benefits in consumption and production. • Describe the external costs and benefits of the construction sector. • Explain how external costs and benefits in production cause inefficiency in production. • Apply the Coase Theorem to explain how private bargaining can lead to an optimum outcome. • Explain why private bargaining does not usually work. • Justify governmental involvement through the use of taxes, emission charges and marketable permits to reduce negative externalities. • Justify government involvement through the use of public provision and subsidies to encourage positive externalities. • Apply the theory of externalities to different scenarios of construction spending in both the private and public sectors.

  3. Externalities • An externality is a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer. • A negative externality imposes a cost and a positive externality creates a benefit.

  4. 4 TYPES OF EXTERNALITY • The four possible types of externality are: a) negative production externalities, b) positive production externalities, c) negative consumption externalities and d) positive consumption externalities.

  5. EXTERNALITY IN CONSTRUCTION SECTOR • As our interest is mainly in the construction sector, we will only focus our attention on production externalities.

  6. ISSUE OF PROPERTY RIGHTS • Externalities arise because of the absence of property rights. Property rights are legally established titles to the ownership, use and disposal of factors of production and goods and services that are enforceable in the courts. • POSITIVE EXTERNALITY • NEGATIVE EXTERNALITY

  7. ASSIGNMENT AND REVIEW A housing developer is considering buying a large plot of swamp land next to an estate of terrace houses where you live. His plan includes building roads as well as a small park. What is the impact on the value of your terrace house? Use the theory of externalities to explain.

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