01

PSIE 4 - POLITICAL ECONOMY

MARKET FAILURE - GROUP 1

EXTERNALITIES
PSIE 4: POLITICAL ECONOMY BA POLITICAL SCIENCE - 3A

MICDAL, SHECAINA NORALYN | MISAJON, KYLE FATIMA | PONCE DE LEON, CHARRIE MAE
 01

DEFINITION:
• THE EXTERNALITIES ARISE WHEN A THIRD PARTY, WHO IS
OTHERWISE IN NO WAY INVOLVED IN THE RELEVANT
MARKET TRANSACTION, IS AFFECTED BY EITHER THE
PRODUCTION OR CONSUMPTION OF A COMMODITY.

IF THE THIRD PARTY IS AFFECTED POSITIVELY, THE

EXTERNALITY IS TERMED AN EXTERNAL BENEFIT; IF
NEGATIVELY, AN EXTERNAL COST.
Ponce de Leon
 02

STATE ACTION:
• THE POLITICAL PROCESS CAN BE USED TO CORRECT MARKET
DEFICIENCIES BY BRINGING PRIVATE COSTS AND REVENUES
INTO LINE WITH SOCIAL COSTS AND BENEFITS.

• FINES ARE IMPOSED ON THE PRODUCER OF THE

EXTERNALITY. SUBSIDIES WORK DIFFERENTLY. HERE THE
GOVERNMENT PAYS THE FIRM A SUBSIDY FOR POLLUTION
ABATEMENT. THE OBJECTIVE OF BOTH OF THESE POLICIES IS
THE SAME: REDUCTION OF EXTERNALITIES.
Ponce de Leon
 03

• THE SECOND MAJOR APPROACH TO CONTROLLING

EXTERNALITIES IS GOVERNMENT REGULATION. REGULATIONS
INVOLVE AUTHORITATIVE PROHIBITIONS AND DEMANDS.

• THE THIRD GOVERNMENTAL RESPONSE TO EXTERNALITIES IS

PROVIDED BY THE JUDICIAL SYSTEM. INSTEAD OF A
GOVERNMENTAL REGULATION, FINE, OR SUBSIDY, INJURED
PARTIES MIGHT FILE A SUIT AND TAKE THE ACCUSED PARTY TO
COURT.
Ponce de Leon
PSIE 4 | Political
| Market Failure | Externalities | 04
Economy

EXAMPLES OF
EXTERNALITIES

Misajon
PSIE 4 | Political
| Market Failure | Externalities | 05
Economy

POSITIVE EXTERNALITY
Positive externalities occur when there is
a positive gain on both the private level
and social level.
external benefit

NEGATIVE EXTERNALITY
Externalities are negative when the
POSITIVE VS social costs outweigh the private costs.
external cost
NEGATIVE
EXTERNALITY
Misajon
PSIE 4 | Political
| Market Failure| Externalities | 05
Economy

POLLUTION
The cost is imposed on agents independently
of their will. In a sense these agents are victims
of an imposed exchange (in which they receive
ill health in exchange for no payment) and as
such is not to the agent's benefit. (Caporaso
and Levine, 2005)

Air Pollution
Water Pollution
Noise Pollution

Misajon
PSIE 4 | Political
| Market Failure| Externalities | 06
Economy

RESEARCH AND
DEVELOPMENT
A company that discovers a
new technology as a result of
research and development
(R&D) activities creates benefits
that help society as a whole.

Misajon
PSIE 4 | Political
| Market Failure| Externalities | 07
Economy

When the cost to the agent suffering the

externality is not calculated into the firm's
costs, the profit-maximizing level of production
must be higher than it would be were that cost
included.

Misajon
PSIE 4 | Political
| Market Failure| Externalities | 08
Economy

For the neoclassical thinker, the idea of a set of

activities in which economic agents engage
others involuntarily opens the door to politics,
in the sense of state action

Misajon
PSIE 4 | Political
| Market Failure| Externalities | 09
Economy

SOLUTIONS
Fines - imposed on the producer of the externality. If a firm
is polluting, the government can impose a fine.

Subsidies - government pays the firm a subsidy for

pollution abatement.

Regulations - involve authoritative prohibitions and

demands.

Lawsuit - injured parties might file a suit and take the

accused party to court.
Misajon
PSIE 4 | Political
| Market Failure| Externalities | 10
Economy

FINES
Fines are imposed on the producer of the
externality. If a firm is polluting, government
can impose a fine. How large a fine should be
imposed? The fine should be just large enough
to cover the gap between private and social
cost. By imposing a fine of this magnitude the
government forces the firm to take account of
(to internalize) the full costs of production. And
by facing squarely the true social costs of their
actions, firms will produce (and pollute) the
optimal amount.
Misajon
PSIE 4 | Political
| Market Failure| Externalities | 11
Economy

SUBSIDIES
Subsidies work differently. Here the
government pays the firm a subsidy for
pollution abatement. The reduction of
pollution becomes part of the process (and
cost) of production.

Misajon
PSIE 4 | Political
| Market Failure| Externalities | 12
Economy

GOVERNMENT
REGULATION
In contrast to fines and subsidies, which attempt to limit
externalities through the price system, regulation seeks
control through establishing rule like standards
that can be legally enforced. In other words,
regulations involve authoritative prohibitions and
demands. Regulations may concern permissible pricing
behavior for monopolies, bidding standards for the
weapons industry, safety standards for airlines, legal
limits of pollution for polluting firms, and rules for the
disposal of toxic waste.

Misajon
PSIE 4 | Political
| Market Failure| Externalities | 13
Economy

LAWSUIT
provided by the judicial system. Instead of a
governmental regulation, fine, or subsidy,
injured parties might file a suit and take the
accused party to court.

for this approach to work, property rights

must be well defined.

Misajon
 Thynk
| Thesis Defense Presentation Template | 05
University

THE PROBLEMS
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| Claudia Alves |
-In the Philippines, one current issue of government failure in
addressing externalities is the inadequate regulation of air and water
pollution.
The rapid industrialization and urbanization in the country have led to
increased pollution from factories, vehicles, and other sources.
However, the government's enforcement of environmental
regulations has been criticized for being weak and ineffective,
leading to negative externalities such as health problems and
environmental degradation for nearby communities.

Micdal
 Another issue is the lack of proper waste management,
leading to negative externalities such as water and soil
pollution.
The Philippines has been facing challenges in dealing with
its increasing volume of waste, particularly in urban areas.
Inadequate waste management practices have resulted in
pollution of waterways and soil, impacting public health
and natural ecosystems.

Micdal
 -The government's failure to regulate and manage
natural resource extraction has led to negative
externalities, such as deforestation, soil erosion, and
habitat destruction.
This is particularly evident in the mining and logging
industries, where inadequate environmental
regulations and enforcement have resulted in
significant ecological damage and displacement of
local communities.

Micdal
These examples of government failure
in addressing externalities in the
Philippines highlight the need for
improved regulation, enforcement,
and sustainable management of
natural resources and the environment
to mitigate the negative impacts on
society and the ecosystem.

Micdal