Worksheet on Social Benefits

Step 1 - Who benefits from what?

Firms produce goods and services to sell them and get revenue. This revenue is the private benefit to the firm. However, their actions may also lead to external benefits (or positive externalities). These are benefits that others gain from the firm's actions. For example, a company may invest in various energy efficiency projects to save them money. This obviously is a private saving to the firm. However, there is also a external benefit as less electricity has to be generated and emissions of greenhouse gases are reduced.

For each of the examples below, try to identify the private and external benefits from the firm's action.

action	private benefit?	external benefit?
A firm recycles the by-products from production	The reuse of the by-products may cut the firm’s production costs	Reduce pollution and its subsequent effects.
The firm pays for private health care for all employees	Healthier employees can work more diligently and productively, increasing the firm’s production.	Government needs to take less care of its citizens in terms of health care (thus lower taxes and greater benefits in other areas)
The firm introduces an extensive training programme at all levels	An educated labor force will increase its productivity, and hence the firm’s profit.	With a more educated population, society faces numerous benefits, for example: 1) more productive population 2) less crime 3) more educated voters
A new electronic intranet improves communication in the firm and cuts down the amount of traveling	Cut the firm’s costs	Reduce pollution resulting from the travelling
Company cars with smaller engines are specified as standard	Cut firm’s costs as cars with smaller engines are less costly	Due to a decrease in emission as a result of smaller engines, the firm’s action will reduce pollution

Will the firm tend to take account of these external benefits in its decisions? No.

On the diagram below the demand curve is based on just the private benefits of consumption. Draw another demand curve that shows both private and external benefits. Try to show the following:-

• the original price and quantity
• the optimum price and quantity for society
• the difference between the actual consumption and the optimum level of consumption

difference between actual consumption and optimum level of consumption

Step 2 - Benefits in practice

There are many examples in practice where firms or local authorities or governments have set up schemes intended to try to encourage these external benefits. Look at the example of Saarbrucken and answer the following questions.

Write a brief summary of how the solar energy system in Saarbrucken worked.

With the goal of reducing the usage of fossil fuel and the subsequent adverse effects on the environment, Saarbrucken set up goals to reduce such energy use and turn to alternate energy use, one of them being solar energy. However, in order to implement this goal, a substantial amount of money had to be invested, and thus it was subsidized by the government.

To encourage the scheme the government had to subsidize the installation the solar cells. Show the effect of this on the diagram below.

THE MARKET FOR SOLAR CELLS

What are the external benefits that arise from this scheme?
1) Reduction of pollution

2) Research in and increase in the practicability of alternative energy sources (other than fossil fuel)

Go to the UN's Best Practices database to read a case study on Recyling Household Waste in Manila (you need to either view or download the case study as a Word document).

Write a brief summary of how the waste management scheme in Manila worked.
Essentially, the Linis Ganda (waste management) program in Manila hired personnel (who are referred to as Eco Aides), whose job is to go around purchasing recyclables from households. This has been an effective way of managing waste in Manila, as this program has “an economic impact of over US$250,000 per month.”

Fill in the external benefits that you would expect from the scheme:
1) Reduce pollution
2) Recycling decreases the need for new raw materials

Would these benefits have arisen if the management of waste had been left to the free market? No.

What can the government do to ensure that these external benefits occur? What policies are available to them to ensure that they are encouraged?

1. Subsidies
2. Command-and-control policies: regulation (for example, make the schemes that yield external benefits a requirement).