Negative Externalities and Regulation
For this activity, you will choose a company that you know firsthand. This firm can be large (like Coca-Cola or Dairy Farmers of America), or it could be a small, local business (for example, your neighborhood grocery store). Once you have a company in mind, work through the following questions, thinking about the externalities involved in conducting business.
1. What is the name of your firm and what kinds of goods or services does the firm offer? (ex. Dairy Farmers of America, milk).
2. State the type of market this firm participates in and provide support for this classification (ex. Dairy Farmers of America is a perfect competitor since its product is nearly identical to that of other producers).
3. Draw a market diagram for one of these goods or services. Label axes, supply and demand curves, and the initial equili
ium price and quantity.
4. What negative externalities might your business create? What third party, not participating in the firm’s transactions, may be harmed? (ex. Cows burp methane, a greenhouse gas, which contributes to rising global temperatures. People living in coastal areas who do not drink milk face costs that are not included in milk transactions, like property damage from flooding.)
5. What type of regulation could work to reduce the external costs of your business? (ex. Allow the dairy industry to have some methane emissions by distributing marketable permits to all farmers. Farmers who can reduce methane levels at a lower cost can sell their unneeded permits to other farmers with higher methane reduction costs and lower the burden of regulation while internalizing pollution costs.)
6. Add the firm’s reaction to internalizing costs to your diagram in question 3. Indicate the new equili
ium price and quantity. Hint: The goal of regulation is to reduce the productive activity that is causing the negative externality and internalize costs that were previously outside of the market, so in equili
ium quantity should decrease and price should increase.
7. Use your knowledge of market structures, elasticity, and government regulation to explain your answer to question 6. (ex. Increasing regulation raises the cost of producing milk, so the supply of milk for DHA shifts to the left. This decreases the quantity of milk in EQ but may only increase DFA’s EQ milk price a little or not at all due to the elastic demand for an individual producer’s goods in this competitive market.)
Worksheet 9: Gross Domestic Product
1. Last year, a small nation with abundant forests cut down $200 worth of trees. It then turned $100 worth of trees into $150 worth of lumber. It used $100 worth of that lumber to produce $250 worth of bookshelves. Assuming the country produces no other outputs, and there are no other inputs used in producing trees, lumber, and bookshelves, what is this nation's GDP? In other words, what is the value of the final goods the nation produced including trees, lumber, and bookshelves? Show your work.
2. In 2018, U.S. nominal GDP was $20.6 trillion (T). If personal consumption expenditures were $14 T, investment was $3.6 T, and government spending was $3.6 T, what was the value of net exports? (Hint: the U.S. imports a greater value of goods than it imports, so the value of net exports should be negative!)
3. Some countries have larger, positive differences between GDP and GNP and others have smaller, negative differences, meaning GNP was larger than GDP. Would you prefer to live in a country with GNP > GDP or GDP > GNP? Why?