The impact of the recent Cyclone (Gabrielle) on the North Island of New Zealand have highlighted the problems of soil erosion and the damage from wood debris left behind after harvest (known as ‘slash’). Tonnes of woody debris, mixed in with silt and sediment, blanketed across landscapes, has destroyed critical infrastructure, farms, homes and polluted rivers and the marine coastal environment. Clear-fell harvesting of pine forests on steep erosion-prone land has been identified as a key source of this phenomenon.
Basically the forestry companies are internalising the benefit of forestry clearing but socialising the cost. This means that after they have taken what they want from the forestry plantation they leave unwanted wood – ’slash’. This ‘slash’ then causes huge damage when they is excessive rain in the area. In economic terms this is referred to negative externalities of production as the forestry company has failed to internalise the cost of the wood debris i.e. they have externalised the cost of the damage caused by slash. The New Zealand Government are to investigate the poor forestry harvesting and management and regulate practices in clearing of forestry land. This issue can be represented by a negative externalities of production graph which is part of the A2 and NCEA Level 3 syllabuses.
- When there is a negative production externality, marginal social cost (MSC) exceeds marginal private cost (MPC), as in Figure 1.
- Firms take decisions on the basis of MPC, so the market settles at Q1, rather than at Q*.
- The shaded area represents the welfare loss for society in this position – i.e. the damage caused by ‘slash’.
- This is where there is ‘slash’ caused by the forestry companies which imposes costs on households, farms, infrastructure etc that are not reflected in the costs faced by the forestry company.
Externalities – Key definitions
- Private cost or benefit: a cost that is incurred (or a benefit that is enjoyed) by an individual (firm or household) as part of its economic activities
- External cost: a cost that is associated with an individual firm or household’s production or other economic activities that is borne by a third party, and is not reflected in market prices
- Social cost: private cost plus external costs
- Marginal social cost: the cost to society of producing an extra unit of a good
- External benefit: a benefit that is associated with an individual firm or household’s production or other economic activities that is received by a third party, and is not reflected in market prices
- Social benefit: private benefit plus external benefits
- Marginal social benefit: the benefit received by society from consuming an extra unit of a good
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