Externalities

1. Externalities econone|k33

2. Externalities • Can also be defined as third-party effects from the production and/or consumption of goods and services for which no appropriate compensation is paid. • Consequence of an economic activity that is experienced by unrelated third parties. • Common in virtually every area of economic activity. • Can be either positive or negative.

3. Externalities • Can cause market failures if the price mechanism does not take into account the full social costs and social benefits of production and consumption. • Externalities create a divergence between the private and social costs of production.

4. Private and Social Costs • Private cost is an alternative that is given up as a result of a decision. • Social cost includes all the costs of production of the output of a particular good or service. • We include the third party (external) costs arising, for example, from pollution of the atmosphere.

5. Examples of Externalities Positive Negative • Effect of a well-educated labor force on the productivity of a company. • Pollution emitted by a factory spoils the surrounding environment and affects the health of nearby residents. • Negative externalities imposes higher social costs on other firms and consumers.

6. Market Failures and Externalities • When negative production externalities exist, marginal social cost > private marginal cost. • The marginal social cost of production exceeds the private costs faced only by the producer/supplier of the product.

7. Market Failures and Externalities • E.G. a supplier of fertilizer to the agricultural industry creates some external costs to the environment arising from their production process.

8. Market Failures and Externalities • If we assume that the producer is interested in maximizing profits then they will only take into account the private costs and private benefits arising from their supply of the product. 

9. Market Failures and Externalities • The private optimum output is whereprivate marginal benefit = private marginal cost • E.G. The socially efficient level of production would consider the external costs too. • The social optimum output level is lower at Q2.

10. Negative Consumption Externalities • Consumers can create externalities when they purchase and consume goods and services. • Pollution from cars and motorbikes  • Litter on streets and in public places • Noise pollution from using car stereos • Negative externalities created by smoking and alcohol abuse • Externalities created through the mistreatment of animals • Vandalism of public property • Negative externalities arising from crime

11. Negative Consumption Externalities • In these situations the marginal social benefit of consumption will be less than the marginal private benefit of consumption. (i.e. SMB < PMB) • Leads to the good or service being over-consumed relative to the social optimum.

12. Negative Consumption Externalities • The disutility (dissatisfaction) created • leads to a reduction in the overall social benefit of consumption. • If the cigarette consumer only considers • their own private costs and benefits, then there will be over-consumption of the product. • E.G. negative effects of people consuming cigarettes on other consumers.

13. Positive Externalities • Technology • Community • Scholarships • Environment • Employee Participation

14. Technology Apple Computers • Environmental policy started in 1990. • Researched ways of manufacturing products without harmful toxic chemicals. • Arsenic-free display glass • Brominated flame retardant-free • PVC-free internal cables • Mercury-free LED-backlit display • Lead, cadmium, and mercury-free battery • Reduced packaging by 37-41%

15. Greener Apple • Products are made with highly recyclable materials. • Recyclable aluminum and glass • Offers free recycling program – you get 10% discount • Low-power consumption

16. Community San Miguel Corporation • Partners with different communities. • Conducts surveys for the community’s profile. • Still pursues an integrated community development approach.

17. San Miguel Corporation • Ilijan Upland Community Development Program • Assists farmers of Mt. Kanlaon, Bago City, Negros Occidental. • The challenge is the reforestation of denuded areas of Mt. Kanlaon. • Provided means to bring them to the city's center of trade and commercial activity. • Two central nurseries of fruit and forest trees were established as a result

18. San Miguel Corporation Scholarships • Community Scholarship Program. • Scholarship Program was launched in the 2002-2003 school year. • A total of 24 scholarship grantees taking up vocational, technological and agricultural courses. • Ginebra San Miguel Scholarship, Inc. • has successfully graduated 101 scholars as of March 2003. • scholars have completed courses in science and technology, engineering, education, and agriculture.  • "Ako'yBatangPinoy…Pag-asangBayan“ to hone their leadership and organizing skills. • Coca-Cola Foundation Philippines, Inc. • aims to enhance the quality of the teachers corps. • 30 partner schools nationwide. • scholars are required to teach in public elementary schools in their respective regions for at least three school years. • has 119 scholars on record. 

19. San Miguel Corporations Environment • Reforestation – More than 270 hectares • Mananga, Cebu • Mt. Kanlaon, Bago City, Talisay, Negros Occidental • Talomo-Lipadas, Davao del Sur. Central • Coastal Resource Management – More than a hundred hectares of mangroves were reforested • Quezon Province • Samal Island, Davao • Bago City, Negros Occidental

20. San Miguel Corporations Employee Participation • employees are encouraged to volunteer and participate in various. • Books-for-the-Barrios Project • Employees donate elementary, high school, and college books, and other education materials. • Promotes the love of reading and sharing of knowledge. • These items are then donated to public elementary and high schools all over the country. 

21. San Miguel Corporations • “Give-A-Life Project” • An employee-driven campaign in support of the call to help the children in the pediatrics ward • Toys, clothes, shoes, medicines and medical equipment were donated. • Cash generated by the campaign and the Corporation’s counterpart contribution were able to purchase more medical needs.

22. References • www.investopedia.com/terms/e/externality.asp • www.tutor2u.net/economics/content/topics/externalities/what_are_externalities.htm • en.wikipedia.org/wiki/Private_cost#cite_note-0 • www.apple.com/environment