NEGATIVE

EXTERNALITI
ES
IN THE CASE
GROUP 1 – POHE COMMERCIAL BUSINESS

OF VEDAN
MANAGEMENT 65
 DEFINITIO
01
N

OVERVIE 02 Solutions

W
Case of
03 VEDAN
01 dEFINI
TION
Negative
externalities
• Occur when the consumption or
production of a good causes a
harmful effect to a third party.

• These external costs are not

reflected in the market price of
the goods or service, leading to
market failure where the social
cost exceeds the private cost.
 Private cost
is any cost that a
person or firm pays in
order to buy or
produce goods and
services

cost Marginal cost

cost of producing an
additional unit of a
good or service

Marginal
private cost
the change in the
producer's total cost
caused by the
production of an
additional unit of a
good or service
External cost
occurs when producing
or consuming a good or
service imposes a cost
(negative effect) upon a
third party

Marginal COST
external cost
the change in the cost
to parties other than
the producer or buyer
of a good or service
due to the production
of an additional unit of
the good or service
 the change in society's total cost
brought about by the production of
Marginal social an additional unit of a good or
service
cost MSC = Marginal PRIVATE cost + Marginal
external cost

Social Cost ≥ Private Cost

Common
examples
Include air pollution,
noise pollution, traffic
congestion, smoking

consumptio
nPlaying loud music
late at night keeping
Common
examples
your neighbours
awake

production
Burning coal for
energy which
creates pollution
 An External
Cost

External
cost
Inefficiency with
an External Cost
02 SOLUT
IONS
 What should
● To limit the impact of negative
externalities, we need to internalize
government
the external effects do to cope
● For the government, measures are with
divided into 2 types: administrative
measures and market-oriented NEGATIVE
measures EXTERNA
LITIES ?
1.
Administrative
measures
• Imposes a certain level of
emissions and the factory must
comply

• Applies discharge fees on each

unit of discharge and imposes
heavy fines on companies that
cause pollution
2.
Market-
oriented
Imposing taxes:
measures
• Imposes Tax = MEC on each unit
of production
• Firms will now have to pay the
MSC = MPC + Tax
• Upward shift due to the addition
of Tax + demand curve remains
unchanged
• Qe moves to Qo eliminating
social loss
 Property rights
achieve an The Coase
efficient outcome Theorem
The Coase Theorem states that
under ideal economic conditions,
where there is a conflict of property
rights, the involved parties can
bargain or negotiate terms that will
accurately reflect the full costs and
Property underlying values (externalities) of
the property rights at issue,
Rights resulting in the most efficient
The exclusive authority to
determine how a resource outcome.
is used, whether that
resource is owned by
government or by
individuals
03 CASE OF
vedan
 1.
Compa
•
ny
Established in 1991 in Long Thanh District,
Dong Nai Province, Vedan Vietnam Joint
Stock Company (Vedan Vietnam) is a
modern integrated food processing and

•
biotechnology industrial park
Overvi
Encompassing facilities such as a

ew
monosodium glutamate (MSG) plant, a
cogeneration power plant, a caustic soda-
acid plant, an organic fertilizer plant, and
more.
2. Environmental Pollution
Incident
• Due to its proximity to the Thi Vai River, in 2008,
Vedan Corporation was found to have been
discharging wastewater into the river environment:
exceeded the permissible wastewater discharge
standards by 10 times or more at three of its factories:
the Modified Starch Factory, the Monosodium
Glutamate Factory, and the Lysine Factory

• The company failed to register environmental

protection commitments directly discharged foul-
smelling and harmful emissions into the environment
without employing pollution control measures

• The company evaded paying 91 billion dong in

-> These untreated waste materials, wastewater fees associated with its wastewater
clandestinely discharged through an discharge system into the Thi Vai River and attempted
to conceal evidence of its wrongdoing
underground system, have played a
significant role in the "death" of the Thi Vai
River over the past 14 years
 • Subjective
Factors
o Cost-cutting measures by Vedan:
+ Limited investment in wastewater
treatment systems.
+ Improper operation of treatment
3. systems to reduce costs.

Causes • Objective
o
Factors
Lax regulatory oversight:
Insufficient supervision from
government agencies
 4. Consequences

 Negatively  Damaged
affected the Vedan
fishery and Vietnam's
tourism industries reputation
 Impacted the ecosystem
and livelihoods of Thi
Vai river local residents.
Created a 10km-long
"dead river" zone
5. Analysis of Negative
Externalities of Vedan's
Wastewater Discharge on
Aquaculture and Fishing
Households in the
We need to examine themarket
Thidemand
Vai River
curve to analyze the market demand for
Basin
Vedan's products

During the production process, Vedan

has been using the river as a wastewater
disposal site without paying any fees.
This discharge has caused damage costs
to aquatic species, fishermen, farmers,
and others. The MEC curve represents
these damage costs, the marginal external
cost curve
Therefore, Vedan has overproduced goods,
discharged excessive waste, and caused economic
losses to society represented by the area of triangle
EAB.
This results in economic inefficiency. The root cause
of this inefficiency lies in the incomplete assessment
of product costs. As depicted in Figure 2, the market
price PM is too low, reflecting only the marginal
private cost of producers and not the marginal social
cost

• Environmental Implications
In the long run, since producers are not held
responsible for pollution, they have no incentive to
reduce output or seek solutions to reduce waste. The
high profits earned from not paying for the damage
costs caused by pollution will encourage more
businesses to enter the industry, leading to further
increases in output and waste generation,
exacerbating environmental problems
 1. For Vedan
6.
• Company
Proposed
Seriously implement sanctions regulations and
corrective measures

solutions • Assess the level of damage caused and be held

responsible and fined many times higher if you
still intentionally violate or neglect to remediate
to the consequences.

overcome 2. For
• government
pollution There needs to be strict supervision and
management by management agencies such as
the Ministry of Finance

on Thi Vai • Taxing negative externalities will be used by

the government to compensate farmers. Apply
river for a discharge permit

• Use public opinion and media to post

information, provide evidence and condemn the
behavior of Vedan company
 7. Conclusion
The Vedan case serves as a stark reminder of the real-world consequences of
negative externalities. It is a prime example of how industrial waste can
wreak havoc on the lives of communities living near polluted waterways,
such as the Thi Vai River. The case highlights the urgent need for stricter
government regulations and enforcement mechanisms to curb harmful
practices by companies like Vedan
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