Negative Externalities
Summary
This activity encourages team discussion about negative externalities- the case of disturbing noise and air pollution from the airport to nearby neighborhoods. The discussion raises possible solutions and the justification for government intervention to possibly increase social well-being.
CollapseContext for Use
This activity will usually be helpful for the last part of "Introduction to Microeconomics" course, while teaching and discussing situations of market failures, as externalities, and the justification for government intervention. The discussion could be helpful for students in all levels- undergraduate or graduate students who are introduced to the principles of economics for the first time, and could be really helpful to show how the economic theory is highly related to real life problems and situations. This is a relatively short discussion in class, could be appropriate to large or small groups, and it should be easy to adapt the discussion to specific class or students' level. It is better if the students will study first the theory and graphs describing negative externalities and will know basic concepts as marginal costs, but the discussion could also be the first introduction to market failures and externalities, as an intuitive background for understanding the theoretical concepts.
Overview
This activity encourages team discussion about negative externalities- the case of disturbing noise and air pollution from the airport to nearby neighborhoods. The discussion raises possible solutions and the justification for government intervention to possibly increase social well-being.
Expected Student Learning Outcomes
This exercise should enable students to understand the concept of external costs. Students will be able to analyze the consequences of externalities and why this government intervention could possibly improve social well-being.
Information Given to Students
You are a neighbor in the closest neighborhood to the airport. As the neighbors' representative, you were invited to participate in the town committee meetings, to help residents deal with the extreme noise and air pollution from the airport. There are several suggestions on the table and you are required to vote for the most appropriate action, after carefully considering the implications and consequences of each one of them.
A. Increase the tax on flight prices.
B. Increase the tax on jet fuel
C. The town will subsidize the installation of soundproof doors and windows for all homes in the vicinity of the airport.
D. The airport's activity will be shut off.
E. All residents will move to another neighborhood.
F. No intervention, keep things as they are
Teaching Notes and Tips
Students should be able to justify their vote and explain the consequences of each. They should be able to draw a graph and explain the economic situation in the model.
The main questions for discussion:
What would happen without any intervention at all?
Is the lower price of homes in the vicinity of the airport sufficient compensation to people who move there after the airport begins to operate?
Should the town use the money of other tax payers in town to solve a problem of this particular neighborhood?
What cost is reasonable for the residents themselves to bear and what cost should be imposed on the airlines using the airport?
Could the town benefit from the situation given the chosen intervention (as extra tax money to the town balance)?
Who would benefit and who would lose from each action?
Assessment
The assessment is done by summative quiz, exam or in problem sets.
Example:
Which of the following cases is a clear case of negative externailites and why? Explain your answer in a sentence of two, describe who imposes the external cost and who suffers from it?
a. Nelly drives her car onto a crowded expressway.
b. A large entry of new residents is driving up apartment rents paid by other consumers.
c. Smokers are more likely to get serious illnesses, resulting in lost wages, pain and suffering, and higher expenditures by public and private health insurance plans.
d. In some rental housing, landlords choose the heating system but tenants pay the energy bills each month.
References and Resources
Read the Washington Post article from March 7th 2016: Are you the person who filed 6500 noise complaints against National Airport?
In addition, make sure to review the definition of negative externalities (based on course text book, as in: http://www.saylor.org/books/):
"If an activity generates external costs, the decision makers generating the activity will not be faced with its full costs. Agents who impose these costs will carry out their activities beyond the efficient level; those who consume them, facing too low a price, will consume too much. As a result, producers and consumers will carry out an excessive quantity of the activity. In such cases, government may try to intervene to reduce the level of the activity toward the efficient quantity."