By econfather, Nov 12 2020 03:56PM
“How did you find your test paper?” I asked one of my students this week. “Easily, Sir, it was just on the desk in front of me” he said.
Learning key chains of analysis ahead of tests is so valuable and is one of the benefits of using Economics Factory’s model answer resources.
A case in point is learning chains of analysis (and accompanying diagrams) in relation to externalities. It is a rare microeconomics A-level paper that does not require analysis of externalities at some point.
A phrase I find extremely valuable in externalities chains is one I borrowed from a mark scheme years ago. “Those who generate third party benefits have no way of using the market to charge for doing so.” The equivalent for negative externalities is that “Those who suffer third party costs have no way of using the market to get compensation”.
This helps to explain why rational economic agents ignore third party effects.
I always find that it is worth stressing to students that externalities are not really an informational failure: Even if rational consumers know about third party effects, they will ignore them. In practice, it may be true that we sometimes take account of the effects of our actions on others, but this is a departure from traditional economic theory.
Where informational problems are more likely to affect consumer decision making is when consumers fail to appreciate the full private benefits/costs of their actions, perhaps due to not having all the information, or perhaps due to other aspects of bounded rationality such as a “present moment bias”. For example, in relation to health care treatments, consumers may have to pay now to get a benefit in the future and evidence suggests that they are poor at processing the true value of those future benefits, discounting them too heavily.
The economics of Covid-19 vaccines, very much in the news this week, makes a great case study of these factors and a number of others. It can be used to encourage students in the skill of application. Why not set a lesson starter based around vaccines? For example, challenge students to create a chain of analysis to explain why vaccines could be considered merit goods. You could also encourage them to think about which other goods might be seen as merit goods in the context of Covid-19 and to compare the different forms of government intervention in relation to them.
I’ve just posted a handout that would be a great follow up resource on the free resources section of this site.