Negative Externalities in China's Market: A Case Study

Running head: ECONOMICS 1
Economics Assignment
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Affiliation
Date

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Question B
Choose a case study from your home country where an externality exists in a current
market
The case study to be used in this paper is China. In this case, various negative
externalities facing china will be evaluated. As a result of the rapid economic growth of China,
various negative externalities in the market have continued to increase. For the last fifteen years,
China has turned into a bigger manufacturing base in the whole world making it to be among the
top four biggest economies. During this period of high economic growth, the average real GDP
of the state increased by 9.7% up to around 11.9% by 2007. However, as the country's economy
grew, the negative externalities also escalated affecting the area and its market. As a result of the
rapid growth of China's economy, the area has suffered high ecological destruction and also
environmental issues which threaten both the market structure and people's health. Apart from
water and air pollution, there has been a high growth in industrial and household waste,
overfishing, felling of the rainforest, and many others. The high rate of pollution in China has
greatly contributed to the rate of climatic changes leading to negative effects. The growth of
China into the largest manufacturing countries has been fostered by its membership in liberation
policies and World Trade Organization (Kostis et al, 2013).
Considering the analysis made by the political leaders of China, the rapid growth of the
economy has not only led to the urbanization of the agricultural societies but also led to a
number of undesirable and unintended effect to the natural resources and the health of the
people. According to various studies, China is the twentieth among the thirty most polluted
cities. As a result of the various negative impacts created by the economy of China,
environmental problems are expected to rise to lead to an 8% effect on the Gross Domestic

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Product. According to the State Environment Protection Administration of China, it indicates
that "reports that almost two-thirds of the 300 cities it tested in 2002 failed to meet minimum
World Health Organization (‘WHO') standards." Therefore, air pollution in China has become a
major environmental problem affecting both people and natural resources. Most of the causes of
air pollution in China are indirectly or directly connected with increased trade which boasts
urbanization and development. However, China’s blame for causing air pollution can not only be
put on China alone but also other small companies operating in the area, for example, Sony,
Nike, and many others. In addition, as a result of the high market in China, most of the
enterprises from different countries have decided to invest in the country with most of them
operating in factories hence increasing the rate of negative externalities of pollution (The United
States International Trade Commission, 2011).
The effect of externality on market outcomes
As a way of trying to reduce the rate of negative externalities in China, its market has
been affected hence disrupting the economy. In this case, it is understood that various sectors in
China have been affected by the anti-pollution drive, for example, metals, coal, gas, energy,
textile, paper, cement, consumer goods, and automobile. The impact created by the negative
externalities in Chins is also expected to affect international food supply chains hence disrupting
china's exports. As a result of firms trying to cope up with various costs of mitigating pollution,
inflation has emerged affecting China's market. In this case, the increased costs incurred by the
companies manufacturing goods in China will be shouldered to the consumers and the middle
class will be affected by trends of inflation in electricity and consumer goods. Further, negative
externalities in China have disrupted the social and financial stability as almost sixty thousand
jobs opportunities have been lost due to the shutdown of factories. As a result of failing to

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manage the costs of regulating the negative externalities in production, the market for goods has
been affected in China as most employers have closed up their companies and factories (Saber
and Heydari, 2012).
In China, very many manufacturing companies (small-scale firms) have closed-up due to
the fact that they are not in the position to compete with their competent rivels as a result of
financial incapability to manage pollution by adopting the new trend of clean energy. Therefore,
the firms that can be able to manage to adapt and survive the environmental regulations and
switch to the trend of clean energy will be successful hence succeeding in the short to medium
run. In addition, the firms will be in the position to take up the market share that was previously
conquered by the small scale firms. Market competition in China will drop as various companies
will fail to survive as a result of extended costs of managing air pollution, this will result into
increased prices of goods by the large firms operating in China. Moreso, the impact created by
the anti-pollution act in China has mostly affected the north and the Beijing-Tianjin-Hebei
region. As a result, the market competition will drop as well as the decline in production leading
to reduced growth of the country's Gross Domestic Product by 2% in the short run, as supply
chains and manufacturing industries will be disrupted accompanied by high costs of technology
and compliance upgrading.However, most experts suggest that the impact created in the market
of goods in China will reduce in the long run as the anti-pollution act will have reduced macro-
economic impact on the economy. If the anti-pollution drive becomes successful, they will have
greater benefits towards the health of the people in the country. Currently, pollution and safety
and health-related issues are continuously among the major top issues affecting Chinese people,
and if the issues are addressed, the international reputation of the country in green technology
will be attained (Raaschou-Nielsen et al, 2011).