Unit 2 – Friday 9th June 2006
(a) Using examples from the high speed rail link, explain the terms (i) external costs (ii) private costs.
- An external cost is a negative effect to a third party who is not directly involved in the activity. Examples: noise pollution, decline in business for cross channel air travel and ferry services, visual pollution, falling property prices.
- Private costs are the negative effects to those directly involved in an activity – the consumer or the firm. Examples: $3.7billion financial costs, wages, electricity, raw materials, machinery, land.
(b) Analyze one problem associated with estimating the external costs and one problem associated with estimating the private costs of a major project such as the high spend rail link.
Problems associated with estimating external costs include it is hard to quantify external costs for example, the amount of visual damage, level of noise pollution, the impact on property prices, the extent of jobs lost in sea and airline industries. It is also hard to attach a monetary value on to such things as the loss of a scenic view, the value of noise pollution and the value of a lost job. Problems associated with estimating private costs include it takes a long period of time to construct the rail link, as time goes on estimates become less accurate. Also, it is a large scale production, meaning huge sums of money are involved, and this means a small miscalculation in percentage terms could represent a large sum in absolute terms. If any technical difficulties, such as tunneling or external shocks such as industrial disruption, landslides and poor weather could lead to a huge change in costs. During production shortages of materials could occur, leading to inflation. The fact that there is a consortium of firms makes it harder to apportion costs out and there may also be insufficient funds to pay for the project if costs are overrun.
