Lecture on unilateral externalities

Anna Klis, Northern Illinois University, Economics
Author Profile
Initial Publication Date: April 12, 2022

Summary

The BASICS module fit in so well on its own and is a lot of work for everyone, so I didn't have an additional activity. Instead, the BASICS lecture was broken up to fit into lecture. I had a lecture on the Commons, and presented the Mississippi River as a large commons. We then looked at a unilateral externality in a Supply-Demand model coming from our book (Jaeger's Environmental Economics for Tree Huggers and Other Skeptics). The model shows an upstream farming community as the demand/benefit side of fertilizers and a downstream fishing community as the supply/cost side of fertilizers. We then look at large-benefit/small-benefit cases, as well as how the distribution of property rights affects the actual equilibrium vs the socially optimal point. Following this lecture, we proceeded to Part 1 of the module. Then, we had a lecture on Pigouvian taxes, as well as property rights, followed by in-class time to work on Part 2 of the module. The next period we had the town hall and lecture, and the period after that we did Part 3.

Share your modifications and improvements to this activity through the Community Contribution Tool »

Learning Goals

We can use an S/D graph to model a non-market good like upstream/downstream pollution.

Context for Use

Course level: 100-level, introductory economics, non-majors

Class size: 35-50 students

Institution type: public research institution

Class/Activity Details: classroom activity, 30 minutes; class meets 2 times a week for 75 minutes, I used 5 periods to introduce and complete the BASICS module

Disciplinary skills or concepts that students should have already mastered before encountering this activity

  • supply/demand models - because it uses supply/demand graphs, this should be in a course that either teaches them or has expectations that students will know them.

Description and Teaching Materials

Five lecture slide decks showing the incorporation of BASICS into the regularly planned class material. Over this time period of 5 lectures, we were looking in-depth at 3 of the 5 hidden assumptions of the free market.

FYI: the 5 hidden assumptions are

  1. Agents are rational (not psychologically, this is a mathematical term meeting preferences are complete and transitive - people can make choices over any two objects, and those preferences stay in order)
  2. The market exists - This is one of the issues with pollutants in the Missippi River. The River is a Commons, or an area to which everyone has access and gets "used up" in a sense. Pollutants are not currently traded, and thus an inefficient amount of waste is entering the River.
  3. No externalities - an externality is an unintended cost or benefit to agents who are not involved in the original decision. Again, this is one of the issues: downstream communities are harmed by upstream decision-making.
  4. No market power (all suppliers and demanders act as "price-takers" and do not think they have the power to set the price)
  5. No asymmetric information - This is somewhat present in the BASICS example. Downstream individuals do not know exactly what is in the water, in what amounts, and perhaps the effects, while upstream know how much fertilizer they are using on an individual level.

Lectures 7-11 attached go through points 2, 3, and 5, while also going through BASICS parts 1-3.
Lecture 7 (Before BASICS) (PowerPoint 2007 (.pptx) 11.6MB Apr12 22)
Lecture 8 (BASICS Part I) (PowerPoint 2007 (.pptx) 5.1MB Apr12 22) 
Lecture 9 (between Parts 1 & 2) (PowerPoint 2007 (.pptx) 2.7MB Apr12 22) 
Lecture 10 (Part 2) (PowerPoint 2007 (.pptx) 3.3MB Apr12 22) 
Lecture 11 (Part 3) (PowerPoint 2007 (.pptx) 5.5MB Apr12 22)

Teaching Notes and Tips

  • Using the online whiteboard system worked very well in distance learning AND in the team boards with only one or two people on a device. Using the online whiteboard with everyone on a device for the class map was not ideal - students became very focused on devices and weren't overly engaged in discussion.
  • Give students time to learn the online whiteboard system.
  • In the context of team-based learning, I had students do Part 1 with their regularly assigned team and jigsawed them to do Part 2 with a new group. They didn't like this, and the resulting team discussions afterward didn't show extra benefit.

Assessment

I used the BASICS assessment itself. I use informal check-ins at the start of class as a test of recall.

References and Resources