In groups, discuss:
- What do you know about pricing?
- How do companies calculate the cost of a good?
- Why are similar goods sometimes priced differently?
- Why are goods different prices in different places?
- What is supply and demand?
- Give a concrete example
Market failure is when pricing mechanism leads to an inefficient allocation of (scarce) resources and loss of economic welfare
Today, we will only consider 2 types of market failure: positive and negative externalities
Externalities are the consequence of an industrial or commercial activity which affects other parties without this being reflected in market prices
- What is not included in the price of:
- Tree planting?
How can we adjust prices, now that we know their externalities?
Externalities do not have to be about pricing. Any activity that has an unintended impact on a third party can be seen as an externality.
Exercise 1: In your table groups
- Define and give one example of:
- Private cost
- Social cost
- Social benefit
2. Explain 2 positive and 2 negative externalities in the school. (Social benefit and social cost)
Exercise 2: In groups of 2
Read one of the following articles, describe it to the class while explaining:
The market failure
One possible solution/outcome
Exercise 3: As a class, we will play Externalities mystery!
You will be divided into 8 groups of 2 or 3
- Each group will briefly explain whether the hospital should be built or not, based on their card’s perspective.
- We will then have small discussions on wether or not the hospital construction should go ahead.
- What were the reasons for your decision?
- Why were those reasons more significant than any other reason?
- What other factors might it depend on?
- What else might you want to know before making a final choice?
- Which costs are private costs/benefits, and which are external?
- Can we put a value on any of these externalities?
- Who is likely to benefit/suffer the most as a result of the hospital project?
Or spot all the externalities in Dr Seuss’ the Lorax