Chapter 21 Social Cost & Benifits
Transcript of Chapter 21 Social Cost & Benifits
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ECONOMICSECONOMICS YEAR 11 YEAR 11
CHAPTER 21CHAPTER 21
SOCIAL COSTS & BENEFITSSOCIAL COSTS & BENEFITS
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Social Cost and benefitsSocial Cost and benefitsEvery business activity which takes place hasEvery business activity which takes place hassome benefits and costs attached to it.some benefits and costs attached to it.
The benefits go both to the owners of the firm asThe benefits go both to the owners of the firm as
well as to externalwell as to external stakeholdersstakeholders. I. I
IIn the same way the owners and the externaln the same way the owners and the externalstakeholders have to pay a cost for the activitiesstakeholders have to pay a cost for the activities
of the business.of the business.
Talking aboutTalking about
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Private cost Private cost
It is the cost of setting up the business. TheIt is the cost of setting up the business. Theownerowner (s) pay for the hire of machinery,(s) pay for the hire of machinery,
buying of materials, payments of wages.buying of materials, payments of wages.This is termed as Private Cost.This is termed as Private Cost.
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Private benefit Private benefit
The monetary benefits i.e. the revenueThe monetary benefits i.e. the revenueearned by the firm is a benefit for the ownerearned by the firm is a benefit for the owner
and is termed as Private benefit.and is termed as Private benefit.
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External Cost External Cost
The problems that the external stakeholders haveThe problems that the external stakeholders haveto bear due to the firms activity are known asto bear due to the firms activity are known asexternal cost.external cost.
Example: cleaning a river which has been pollutedExample: cleaning a river which has been pollutedby a firms waste products. Private firms usuallyby a firms waste products. Private firms usuallyignore external cost ignore external cost
Social cost is the total cost paid for by the societySocial cost is the total cost paid for by the societydue to the activities of a firm. It is the sum of alldue to the activities of a firm. It is the sum of allthe external cost and private cost.the external cost and private cost.
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External benefitsExternal benefits
Some firms can cause external benefits. These areSome firms can cause external benefits. These arethe benefits to the external stakeholders due tothe benefits to the external stakeholders due tothe activity of firm.the activity of firm.
For example, a firm may train workers, whichFor example, a firm may train workers, whichmight get them better wages in other firms. Thesemight get them better wages in other firms. Theseexternal benefits are free.external benefits are free.
Social benefit is the total benefit arising due to theSocial benefit is the total benefit arising due to the
production of goods and services by a firm. This isproduction of goods and services by a firm. This isequal to the total of private benefits and externalequal to the total of private benefits and externalbenefits.benefits.
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Do exercise 1 Page 394 to 395Do exercise 1 Page 394 to 395
GROUP EXERCISEGROUP EXERCISE DIVIDE into 3 groupsDIVIDE into 3 groupsThe directors/ local representatives/The directors/ local representatives/
arbitratorarbitrator
Discuss / Prepare a report/ A solutionDiscuss / Prepare a report/ A solution
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For the Company & CommunityFor the Company & Community
The reasons for the investment The reasons for the investment
The pros & consThe pros & cons
A report for the cost & benefits of each A report for the cost & benefits of eachpartyparty
To present the report to each other & toTo present the report to each other & to
find a solution for the majority to benefit find a solution for the majority to benefit
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For the government For the government
To preside over the 2 partiesTo preside over the 2 parties
During the discussion, the government During the discussion, the government
needs to have representatives to listen andneeds to have representatives to listen andadvise on each groupadvise on each group
To ensure the benefits of all concernTo ensure the benefits of all concern
To ensure the betterment of the nationTo ensure the betterment of the nationIf there is no solutionIf there is no solution the government the government
must make sure there will be a solutionmust make sure there will be a solution
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For AllFor All
The CM/ CEO/ Chieftain has the right toThe CM/ CEO/ Chieftain has the right todismiss anyone in their committee for not dismiss anyone in their committee for not
contributingcontributingParticipation & Feedback is crucial by allParticipation & Feedback is crucial by all
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Time frameTime frame
15 minutes for discussion by each group15 minutes for discussion by each group
10 minutes presentation by each group10 minutes presentation by each group
10 minutes for negotiation10 minutes for negotiation10 minutes for further discussion10 minutes for further discussion
10 minutes for renegotiation10 minutes for renegotiation
10 minutes for 3rd discussion10 minutes for 3rd discussion
10 minutes for government discussion10 minutes for government discussion
10 minutes for government presentation10 minutes for government presentation
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Market Failure & Govt IntervevtionMarket Failure & Govt Intervevtion
For Chemix Plastics making companyFor Chemix Plastics making company mainmainaim is to make profit (commercial return)aim is to make profit (commercial return)
For that social cost > social benefits, societyFor that social cost > social benefits, societyis worse off oris worse off or uneconomic use of resourcesuneconomic use of resources
Market Market systems failed to use resourcessystems failed to use resourcesefficientlyefficiently
Thus such failure, government will interfereThus such failure, government will interfere
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There is a clearThere is a clear economic caseeconomic case forfor governmentgovernmentinterventionintervention in markets where some form of in markets where some form of
market failuremarket failure is taking place. Government canis taking place. Government can justify this by saying that intervention is in the justify this by saying that intervention is in thepublic interestpublic interest..
Basically market failure occurs when markets doBasically market failure occurs when markets donot bring about not bring about economic efficiencyeconomic efficiency..
In simple terms, the market may not alwaysIn simple terms, the market may not alwaysallocateallocate scarce resourcesscarce resources efficiently in a wayefficiently in a waythat achieves the highest totalthat achieves the highest total social welfaresocial welfare..
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EXAMPLES OF POTENTI AL MARKET F AILUREEXAMPLES OF POTENTI AL MARKET F AILUREPublic GoodsPublic Goods not provided by the free market because of their twonot provided by the free market because of their twomain characteristicsmain characteristics
NonNon--excludabilityexcludability where it is not possible to provide a good to onewhere it is not possible to provide a good to oneperson without it thereby being available for others to enjoyperson without it thereby being available for others to enjoy
NonNon--rivalryrivalry where the consumption of a good or service by onewhere the consumption of a good or service by oneperson will not prevent others from enjoying it person will not prevent others from enjoying it
ExamplesExamples: Street lighting / Lighthouse Protection, Police: Street lighting / Lighthouse Protection, Policeservices, Air defence systems, Roads / motorways,services, Air defence systems, Roads / motorways, FloodFlooddefence systems, Public parks & beachesdefence systems, Public parks & beaches
Because of their nature theBecause of their nature the private sectorprivate sector is unlikely tois unlikely tobe willing and able to provide public goods. Thebe willing and able to provide public goods. Thegovernment therefore provides them forgovernment therefore provides them for collectivecollectiveconsumptionconsumption and finances them throughand finances them through generalgeneraltaxationtaxation..
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Merit GoodsMerit Goods
Merit GoodsMerit Goods are those goods and services that theare those goods and services that thegovernment feels that people left to themselves willgovernment feels that people left to themselves willunderunder--consumeconsume and which therefore ought to beand which therefore ought to besubsidisedsubsidised or provided free at the point of use.or provided free at the point of use.
Both the public and private sector of the economyBoth the public and private sector of the economycan provide merit goods & services. Consumption of can provide merit goods & services. Consumption of merit goods is thought to generatemerit goods is thought to generate positive effectspositive effectswhere thewhere the social benefitsocial benefit from consumptionfrom consumption
exceeds theexceeds the private benefitprivate benefit..
Examples:Examples: Health services, Education, WorkHealth services, Education, WorkTraining, Public Libraries, Citizen's Advice,Training, Public Libraries, Citizen's Advice,InoculationsInoculations
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MonopolyMonopoly
Few modern markets meet the stringent Few modern markets meet the stringent conditions required for a perfectlyconditions required for a perfectlycompetitive market.competitive market.
The existence of The existence of monopoly powermonopoly power is oftenis oftenthought to create the potential for market thought to create the potential for market
failure and a need for intervention to correct failure and a need for intervention to correct for some of the welfare consequences of for some of the welfare consequences of monopoly power.monopoly power.
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InequalityInequality
Market failure can also be caused by the existenceMarket failure can also be caused by the existenceof of inequalityinequality throughout the economy. Widethroughout the economy. Widedifferences in income and wealth betweendifferences in income and wealth betweendifferent groups within our economy leads to adifferent groups within our economy leads to a
wide gap inwide gap in living standardsliving standards between affluent between affluent households and those experiencing poverty.households and those experiencing poverty.
The government may decide to intervene toThe government may decide to intervene to
reduce inequality through changes to the tax andreduce inequality through changes to the tax andbenefits system and also specific policies such asbenefits system and also specific policies such asthethe national minimum wagenational minimum wage
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INEFFICIENCY INEFFICIENCY
Producing too little or too much for theProducing too little or too much for themarket market
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GOVERNMENT INTER VENTIONGOVERNMENT INTER VENTION
Pollution taxes to correct forPollution taxes to correct for external cost external cost Taxation of monopoly profits (the Windfall Tax)Taxation of monopoly profits (the Windfall Tax)
Regulation of oligopolies/cartel behaviourRegulation of oligopolies/cartel behaviour
Direct provision of public goods (defence)Direct provision of public goods (defence) Policies to introduce competition into markets (dePolicies to introduce competition into markets (de--
regulation)regulation)
Price controls for the recently privatised utilitiesPrice controls for the recently privatised utilities
NationalizationNationalization
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Opportunity Cost revisitedOpportunity Cost revisited
What is Opportunity Cost?What is Opportunity Cost?
Because of scarcityBecause of scarcity we must choose what we must choose what
to do with scarce resourcesto do with scarce resourcesIn choosing one, we must give up the otherIn choosing one, we must give up the other
The benefit of the next best alternativeThe benefit of the next best alternative
given up is known as OCgiven up is known as OC
Do exercise 2 page 398Do exercise 2 page 398
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How consumers decisions can affect How consumers decisions can affect others???others???
See the 3 examples on page 399See the 3 examples on page 399
Do exercise 3 page 399
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What are we trying to achieve?What are we trying to achieve?
Our wants are increasingOur wants are increasing
High consumption of goods are causingHigh consumption of goods are causing
mountains of wastes/ global climate changemountains of wastes/ global climate changethru pollution/ using scarce resourcesthru pollution/ using scarce resources
High impact on people and environment allHigh impact on people and environment allover the world now and for futureover the world now and for futuregenerationsgenerations
Group : Do Exercise 4 page 400