Economics Report: Analyzing China's Market Externalities and Policies

This economics report examines the negative externalities arising from China's rapid economic growth, with a specific focus on air pollution and its impact on the market. The report analyzes the effects of these externalities on market outcomes, including the disruption of supply chains, inflation, job losses, and decreased market competition. It also explores the concept of deadweight loss caused by the externalities. Furthermore, the report evaluates the measures taken by the Chinese government to address these issues, such as the implementation of mist cannons and the use of AI systems for pollution prediction. Finally, the report suggests additional options for dealing with negative externalities, including the adoption of solar power, the use of power backups, and the discouragement of waste burning. The report references various academic sources to support its analysis and conclusions.

Running head: ECONOMICS 1
Economics Assignment
Name
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,

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environmental problems are expected to rise to lead to an 8% effect on the Gross Domestic
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

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jobs opportunities have been lost due to the shutdown of factories. As a result of failing to
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,

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and if the issues are addressed, the international reputation of the country in green technology
will be attained (Raaschou-Nielsen et al, 2011).
In this case, it is observed that most companies in China are affected by the negative
externality of pollution as production is affected. This is as a result of the high costs involved in
mitigating air pollution and adapting to the new technology of preserving the green environment
which is very expensive to small scale firms. As a result, there will be high prices of different
products in the long run hence affecting the market. Also, the negative externalities lead to
inequalities among different manufacturing companies in China, this is as a result of a bigger gap
created between the costs of mitigating air pollution, as big firms will quickly adapt to the new
technology as compared to the small scale firms.In case the manufacturing firms are not
effectively regulated in the market about air pollution, they will not be in the position to take
their costs hence affecting the environment. Therefore, the manufacturing firms have a reduced
Marginal cost as they would have hence affected the nature of the supply7 curve by shifting to
the right or down of the supply curve. As a result of the increased supply curve, more products
are produced and consumed without considering the efficiency of production. As a result of
differentiated marginal costs of managing air pollution and the marginal benefit of the firms are
not equal, a deadweight loss occurs in the welfare (Dons, 2011).
Figure 1: A deadweight loss

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Source: https://www.economicsonline.co.uk/Market_failures/Externalities.html
The graph above indicates the effect created by a negative externality (air pollution) to
the market of China. Line MSC represents the marginal cost curve or supply curve of the society
whereas line MPC indicates the firm's marginal cost curve as a result of the air pollution. The
graph indicates the "optimal production quantity" as of Q1, the negative externality (air
pollution) result into Q. the deadweight loss in the figure above is indicated in blue color
(Gonzalez and George, 2012).
Ways adapted by China to address the presence of negative externalities in the market
Currently, China has adopted various innovations to address the issue of negative
externalities (air pollution). Various large polluted cities such as Guigang have implemented mist
cannons, which are shoot in the air so as to disperse smog objects. As a way of combating air
pollution, the government of China has invested $7.6 billion. In the government of China has
created a partnership with IBM to test a Green Horizon system which uses AI. The system is

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used to predict the nature of pollution within ten days in advance. Further, the system is used to
crush large varied data that are based on industrial production, weather, traffic, and many others.
According to the scientist researcher Dr. Meng Zhang, "This way, the government can take
actions to reduce potential risk". Various researchers in China indicate that in the long run, the
country will become a service-based economy because it will be in the position to lower
emissions. Notably, the country will be in a position to produce high-quality goods with reduced
levels of energy. Various economic experts such as Creyt think that it is not too late for the
government of China to save its air (Hsu et al, 2013).
Currently, China has adopted various innovations to address the issue of negative
externalities (air pollution). Various large polluted cities such as Guigang have implemented mist
cannons, which are shoot in the air so as to disperse smog objects. As a way of combating air
pollution, the government of China has invested $7.6 billion. In the government of China has
created a partnership with IBM to test a Green Horizon system which uses AI. The system is
used to predict the nature of pollution within ten days in advance. Further, the system is used to
crush large varied data that are based on industrial production, weather, traffic, and many others.
According to the scientist researcher Dr. Meng Zhang, "This way, the government can take
actions to reduce potential risk". Various researchers in China indicate that in the long run, the
country will become a service-based economy because it will be in the position to lower
emissions. Notably, the country will be in a position to produce high-quality goods with reduced
levels of energy. Various economic experts such as Creyt think that it is not too late for the
government of China to save its air (Mattlin and Mikael, 2011).
Question C

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Options for dealing with negative externalities in China
Apart from the various measures already implemented by the government of China to
address the high levels of air pollution, there are some other options that can also be used such
as; first, use of solar power, this can be adapted so as to reduce the use of coal-based power
plants (Scissors and Derek, 2016).In this case, the government of China should encourage the
installation of solar panels in multi-story buildings, commercial establishments, and homes so as
to have an efficient and cost-effective generation of power. Considering the cost of solar panels,
it is cheaper as compared to the use of coal. Therefore, the use of all thermal power should be
stopped in China so as to regulate the level of the AQI at least below 200 (Fan and He, 2015).
Second, the use of power backups to reduce the use of generators in factories, homes and
other commercial areas. By installing power backups, the need for generators in China will slow
down. Also, disease generators should not be encouraged to be used in industries as they emit
many poisonous gasses in the atmosphere. Therefore, the government of China should make sure
that all the industries operating within the region are in the position to install power backups and
use petrol generators so as to ensure that there is no emission of dangerous smoke into the air
(Kostis, 2013).
Last, burning waste, this should be discouraged and made punishable so as to conserve
the environment. In this case, the government of China should condemn such act of burning tires,
leaves and other industrial wastes. However, industries are encouraged to find other ways of
dealing with the wastes but not bunning them. Burning of wastes in China should be an offense
that is a punishable and every person in the regions should be responsible for reporting any case
observed (George et al, 2013).

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Question D
Market structure of China
China's market structure is a “socialist market economy because it is dominated by state-
owned and public enterprises with the top sectors being; financial industry, agriculture and
forestry, mining industry, and the manufacturing industry. It is observed that the manufacturing
industry in China leads the market competition as it is the biggest investment done in the area,
this is followed by other industrial services, and the financial industry takes the last position
(Brodsgaard et al, 2017).
In China, the manufacturing and the mining industry are in a perfect competition and
oligopoly market structure. As a result of the perfect competition in the manufacturing industry,
there are various barriers to entry in such an industry, for example, market experience, and the
increased returns to scale. The manufacturing industry is dominated by companies such as SAIC
MOTO, Sinopec, and FAW Automotive. On the other hand, the market structure of the retail
industry is monopolistic competition and oligopoly. In this case, it is always very difficult for
small companies to enter into a monopolistic market because there are various costs incurred, for
example, high advertising costs, high production costs, and many others (Wang and Mengkui,
2013). In a monopolistic market, there is always an increasing scale returns. This industry is
dominated by three major companies, that is to say, lining, Adidas, and Nike. For the
agricultural, fisheries and forestry sector, their, market is perfect competition because similar
crops have the same prices and there is free entry and exit from the industry. In this case, the
agricultural sector in China is dominated by two companies such as Beichuan group and Shunxin

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agriculture. Therefore, the market structure of China depends on the nature and performance of
the industry (Lou and Jiwei, 2013).

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References
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Market Economy in China: Economic Discourse and Development from 1953 to the
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carbon". Atmospheric Environment. 45 (21): 3594–
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Fan, & He. (2015). "The Long March to the mixed economy in China". East Asia Forum
George J. Avlonitis et al. (2013). Pricing objectives and pricing methods in the
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Gonzalez, & George, A. (2012). The politics of air pollution: Urban growth, ecological
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Hsu, Jennifer; Hasmath, & Reza, eds. (2013). The Chinese Corporatist State: Adaption, Survival,
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Lou, Jiwei. (2013). Chinese Economists on Economic Reform – Collected Works of Lou Jiwei.
Taylor & Francis. ISBN 978-1-135-08246-8.

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Mattlin, & Mikael.(2011). "Whose Money? The Tug-of-war over Chinese state enterprise
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