Lesson Report:
**Title: Market Failures, Externalities, and Public Goods in Urban Policy**
Today’s session continued the week’s focus on markets by zeroing in on *market failure*, especially externalities and public goods, and how these motivate government intervention. Through concrete local examples (Yandex scooters in Bishkek and coal heating in private houses), students practiced identifying when a seemingly efficient private exchange creates broader social costs. The class also began systematically mapping the “ripple effects� of these transactions in preparation for later work on specific policy responses.
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### Attendance
Students explicitly mentioned as *not present* during roll call:
– **Ali** – present at first, then “vanishedâ€�; no confirmation of return during transcript.
– **Altenay / Altenai** – called twice, “not yetâ€� both times; no later confirmation.
– **Hadija / Hadidya** – noted as “has not yet,â€� and later “has to be brought online / when is she coming backâ€�; no confirmation of attendance.
**Count of students mentioned absent or not yet present:** **3**
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### Topics Covered (Chronological, with Detailed Content)
#### 1. Administrative Openers: Attendance and Missing Reading
– Instructor began with roll call, informally engaging with students as names were called.
– **Reading issue:**
– Instructor **apologized** that the assigned reading on markets/market failures was *not uploaded* to e-course due to research deadlines.
– Clarified:
– Students **do not need the reading for today**.
– Reading will be uploaded later **for reference**, but there was **no expectation** that it was read in advance of this class.
—
#### 2. Quick Review of Tuesday’s Core Concepts: Markets and Efficiency
The instructor explicitly framed this as a **brief review** to ensure a shared foundation before going deeper into market failures.
– **Definition of a market:**
– Student answer: “a place where people work directly with stocks and buyers …â€�
– Instructor refinement:
– A **market** is a **system of exchange** where:
– Some people **buy** things,
– Some people **sell** things,
– Not limited to physical “placesâ€� or to buying/selling goods; can be any **exchange of things for value**.
– **Water market example (reviewed from previous class):**
– Scenario: Aydana (Idauna in transcript) is thirsty at AUCA.
– She goes to Coffee Mania.
– She gives **30 soms** to the seller.
– She receives a **500 ml bottle of water**.
– **Why this is a “good dealâ€� and likely efficient:**
– Aydana:
– Values quenching her thirst more than holding onto 30 soms.
– Voluntarily parts with the money → she is better off in her own assessment.
– Seller:
– Considers 30 soms an adequate price that at least covers cost and yields profit.
– Voluntarily gives up the bottle → also better off.
– **Definition of market efficiency (as discussed Tuesday and reiterated today):**
– Student contribution: “Both the seller and the purchaser need to get the maximum value by the low cost.â€�
– Instructor simplification:
– In an **efficient market exchange**, **both sides are happy** with the deal:
– Each feels they are “getting the most for the least.â€�
– Both believe they are on the “good sideâ€� of the deal.
– Applied back to the **water example**:
– Exchange of **30 soms for water** is judged efficient because:
– Buyer’s need (thirst) is satisfied at a low, acceptable price.
– Seller earns revenue consistent with their valuation of the product.
—
#### 3. New Service Example: Yandex E‑Scooters as a Market Exchange
Moving beyond bottled water, the instructor used **electro scooters (Yandex scooters)** as a modern local service-market example.
– **Student poll:**
– How many regularly use rental e-scooters?
– How many have used one at least once?
– Majority had tried at least once → suitable shared reference point.
– **Identifying the parties to the transaction:**
– Buyer: a rider, with Erhan used as the **example buyer**.
– Seller: **Yandex** (the scooter rental company).
– **Defining what is exchanged:**
– The **good itself (the scooter)** is **not** being transferred in ownership.
– The exchange is:
– **Money** (from Erhan) for
– A **service**: time-limited use of the scooter (e.g., 30 minutes).
– **Efficiency assessment:**
– Buyer (Erhan):
– Gains quick transport, avoids traffic, can ride on sidewalks.
– Achieves mobility benefits relative to cost (“100 soms for 30 minutesâ€� was used illustratively).
– Seller (Yandex):
– Receives revenue from fees.
– Both sides are voluntary participants and appear **satisfied** → the **core transaction is efficient** from the perspective of buyer and seller.
—
#### 4. Introducing Externalities via the Scooter Example
The instructor then challenged the simple two-party view by asking: **Who else is involved?** How do *non-users* experience scooters?
– **Class discussion: How non-users experience scooters in Bishkek:**
– As pedestrians:
– Almost getting hit by fast riders (30–50 km/h) on sidewalks.
– Feeling unsafe walking in areas with frequent scooter traffic.
– As drivers:
– Sudden, fast-moving scooters crossing at crosswalks.
– Needing to brake hard or swerve to avoid accidents.
– As sidewalk users:
– Encountering **piles of scooters** blocking walkways.
– Having to navigate around clusters of parked or toppled scooters.
– **Key concept introduced: externalities**
– Instructor’s definition (paraphrased):
– An **externality** exists when a **market transaction affects people who are not directly involved in that purchase** and did **not consent** to participate.
– Clarification:
– Externalities can be:
– **Negative** (e.g., nearly being hit, obstruction of sidewalks, increased risk and stress).
– **Positive** as well (in principle), though the instructor noted they didn’t have a ready positive scooter example on hand.
– **Why scooters create externalities:**
– It is not just a single, isolated transaction (Erhan ↔ Yandex).
– Yandex’s business model involves **many riders**, saturating public space with scooters and riding activity.
– This widespread use **imposes effects** (risk, inconvenience, danger, clutter) on:
– Pedestrians,
– Drivers,
– Anyone using sidewalks/streets,
– Even urban infrastructure (trees, signage).
– **Example of externality on non-human entities:**
– Student example: riders damaging trees or bushes or public signs with reckless riding.
– Instructor confirmed: this is also a **negative externality** (damage to public infrastructure, environmental assets).
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#### 5. Public Goods: Why Externalities Arise in These Cases
To explain **why** so many people are affected, the instructor linked externalities to **public goods**.
– **Core idea:**
– **Externalities often arise when a transaction makes intensive use of a *public good*.**
– **Identifying the public good in the scooter case:**
– **Streets and sidewalks** are the key public goods used by Yandex scooters.
– **Definition of public goods (two criteria):**
1. **Non-excludable**
– It is **difficult to stop people from using** the good.
– Example:
– You cannot easily prevent people from walking on a sidewalk.
– To exclude people, you’d need to block it fully, fence it, post signs, etc., which is costly and rarely done.
2. **Non-rivalrous**
– **Use by one person does not prevent others from using it simultaneously** (up to a point).
– Example:
– One person walking on a sidewalk does not normally stop others from using it.
– Many people can walk on the same sidewalk at once without direct competition.
– **Logical chain emphasized:**
1. Some market transactions **affect more people than just buyer and seller**.
2. These impacts on third parties are called **externalities**.
3. Externalities often occur when **public goods** are being used in the transaction.
4. A **public good** is typically both **non-excludable** and **non-rivalrous**.
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#### 6. Student Questions Clarifying Externalities vs. Participants
– **Question: Can environmental damage to trees be considered an externality?**
– Example: someone drives badly and hits a tree or sign.
– Instructor: Yes, that’s a **negative externality**—public or environmental resources are damaged as a by-product of private behavior.
– **Question: Is the bank (processing electronic payments) an externality in the scooter transaction?**
– Student asked if the bank could be considered an externality because it is “includedâ€� in the electronic purchase.
– Instructor’s answer: **No**.
– Reason:
– A bank is an **intermediary** that **consents** and is directly paid (through fees) as part of the transaction chain.
– It is **part of the market exchange**, not an outside party involuntarily affected.
– Externalities concern those who are **not part of the agreed chain of exchanges** (e.g., pedestrians almost hit, neighbors breathing smoke).
—
#### 7. Linking Market Failures to Public Policy: Conditions vs. Policy Problems
The instructor brought the discussion back to **public policy analysis** and the role of government.
– **Reconnection to early-semester framework:**
– Problems can be classified as:
– **Conditions** – unwanted situations that we do not believe can be (or should be) meaningfully solved by policy.
– **Policy problems** – issues that **can** be solved (or significantly improved) and for which **government is expected to take responsibility**.
– **Scooter injuries and sidewalk danger: condition or policy problem?**
– Problem summarized:
– People being hit or nearly hit by scooters on sidewalks.
– Fear and discomfort walking in public spaces.
– Class consensus: **this is a policy problem** because:
– It causes serious harm or risk.
– It is relatively **feasible and not too expensive** to address (e.g., regulation, enforcement, infrastructure design).
– **Key conceptual point:**
– **Public policy “happens where markets fail.â€�**
– While idealized free markets are often celebrated, real-world markets:
– **Generate externalities**,
– Fail to account for social costs,
– Do not self-correct in ways that internalize these costs (e.g., Yandex is not spontaneously requiring licenses or fully addressing the risk of crashes).
– When such failures create **significant negative externalities**, government intervention is often justified and expected.
—
#### 8. Second Major Example of Negative Externality: Coal Heating and Air Pollution
To generalize the concept beyond scooters, the instructor turned to **home heating in Kyrgyzstan**.
– **Context discussion:**
– Many students or their families live in **private houses (chastny sektor)**.
– Various ways to heat houses in winter:
– **Gas**, **electricity**, **central heating** (if connected),
– **Coal** (very common).
– **Why coal is widely used:**
– Coal is relatively **cheap** and **easily accessible**.
– For many households, it is the **most affordable** way to avoid freezing in a cold climate.
– **Market transaction set-up:**
– Seller (Bike cam 2 in the drawing) has coal stock.
– Buyer (Bike cam 1) newly built a house for his family and needs fuel.
– Exchange:
– Buyer gives ~**5,000 soms** (illustrative figure).
– Receives a quantity of coal (e.g., a couple tons; transcription said “two kilosâ€� but context suggests *much more*—students will know actual scale).
– **From buyer and seller perspective:**
– Buyer:
– Gains warmth and safety for his family at manageable monetary cost.
– Seller:
– Monetizes coal he does not personally need.
– Appears **efficient** as a bilateral market exchange.
– **Identifying the externality:**
– What happens next?
– Coal is **burned** in the house’s heating system.
– Burning coal produces **smoke and pollutants** (particulate matter, gases).
– **Who is affected but did not consent?**
– Neighbors and broader community who:
– **Breathe the polluted air**.
– Did not agree to be part of Bike cam 1’s heating decision.
– Externality characterization:
– A **negative externality**: neighbors and city residents bear **health and environmental costs** from private combustion decisions.
– **Public good involved: air**
– Is this an externality by the earlier definition? Yes, because it uses a **public good**: **air**.
– **Air as a public good:**
1. **Non-excludable:**
– We **cannot easily stop** people from breathing the surrounding air.
– You can’t fence off “clean airâ€� for some and “dirty airâ€� for others in a city.
2. **Non-rivalrous (at the level of breathing access):**
– One person breathing does **not prevent** another person from breathing.
– There is generally enough “air to go around,â€� even if it is degraded in quality.
– **Ripple of effects from coal burning:**
– Local level:
– Neighbors experience **smell, smoke, reduced visibility**.
– Children like “little Akelbeckâ€� get **chronic coughs**, asthma or respiratory issues.
– Neighboring houses accumulate **black dust/soot** on surfaces.
– City-wide / regional level:
– **Air quality index (AQI)** and **PM2.5** levels rise.
– Instructor asked about how pollution is measured; students mentioned COâ‚‚ emissions, and instructor pointed specifically to AQI and PM2.5 as core metrics.
– Health outcomes:
– Elevated rates of respiratory and cardiovascular disease.
– Earlier mortality; greater burden on healthcare system.
– Economic and reputational effects:
– Damage to **tourism** if visitors avoid winter due to toxic air.
– Global environmental impact:
– Contribution to **climate change** via greenhouse gas emissions.
—
#### 9. Activity 1 – Ripple Maps of Negative Externalities
The instructor then transitioned to an applied exercise to help students systematically visualize externalities.
– **Instructions:**
– Students choose **one** of the two examples:
– Scooter rentals (Yandex scooters), or
– Coal burning for home heating.
– In their notebook, draw **three concentric circles** (“ripple mapâ€�).
– Label/fill:
1. **Innermost circle** – **Effects on the buyer and seller**
– What does each party **get** from the exchange? (money, service, product, etc.)
2. **Middle circle** – **Effects on others outside the transaction**
– How are people who **did not consent** to the transaction affected?
– Concrete examples: injuries, inconvenience, damage to property, etc.
3. **Outermost circle** – **Effects on the city or environment**
– Assume many similar transactions occur (not just one).
– What are the **cumulative impacts** on:
– The city’s functioning (traffic, infrastructure, public health),
– The environment (air quality, climate, ecosystems)?
– Students were given ~5 minutes to complete maps individually.
– **Clarification during activity:**
– For the innermost circle:
– Focus only on **buyer and seller** and **what they gain/lose** directly.
– For middle and outer circles:
– Emphasis on **non-consenting parties** and **broader societal/environmental scales**.
—
#### 10. Debrief of Ripple Maps – Scooter Case
The instructor debriefed first the small group who had chosen **scooters**.
– **Innermost circle – Buyer & seller:**
– Buyer (e.g., Erhan):
– Gains **cheap, effective transport**.
– Time savings, avoidance of traffic, convenience.
– Possibly faces **safety risk** as a negative direct effect.
– Seller (Yandex):
– Gains **money (revenue)** from usage fees.
– Also gains **data** on users (mentioned; instructor flagged this as complex – see below).
– **Discussion point: data collection/ privacy as externality?**
– Student raised concern about:
– Yandex tracking **location and travel patterns**, data mining.
– Instructor noted:
– Company would argue Erhan **consented** by pressing “agreeâ€� in the app.
– But from Erhan’s perspective, this might not feel like **meaningful consent**.
– It is debatable whether data extraction should be considered:
– A **direct term of the contract** (thus not an externality), or
– A **hidden cost** that might function like an externality.
– Instructor chose not to resolve this fully now, labeling it **“more complicatedâ€�**, and kept focus on simpler, physical externalities for this class.
– **Middle circle – Immediate effects on non-participants:**
– **Pedestrians:**
– Risk of **being hit**, especially elderly (e.g., “grandmas on the sidewalkâ€�).
– Injuries or near-miss experiences → fear and stress.
– **Drivers:**
– Emergency braking or swerving to avoid fast scooter riders.
– Higher risk of traffic accidents.
– **Other scooter users and people in general:**
– Potential collisions between two riders.
– **Public infrastructure:**
– **Damage** to trees, bushes, and signage caused by crashes.
– **Sidewalk usability:**
– **Obstruction** from piles of parked or fallen scooters.
– People forced to detour or “crawl around them.â€�
– General degradation of sidewalk as a safe, free passageway.
– **Outermost circle – City/environment level:**
– **City-wide traffic safety:**
– More frequent **emergency situations** for drivers.
– Overall increase in number and severity of road incidents involving scooters.
– **Infrastructure degradation:**
– Cumulative **wear and damage** to sidewalks, curbs, trees, and signage.
– Broader implications (implied, if not fully spelled out):
– Long-term need for **more maintenance spending**.
– Potential pressure for **regulatory changes**, redesigns of bike/scooter lanes, etc.
—
#### 11. Debrief of Ripple Maps – Coal Burning Case
Most of the class had chosen the **coal burning** example.
– **Innermost circle – Buyer & seller:**
– Buyer (household):
– Pays money.
– Gains **warmth**, safety from cold, and comfort for family.
– Seller (coal supplier):
– Sells coal.
– Gains **income**.
– **Middle circle – Effects on non-consenting neighbors:**
– **Health impacts:**
– Neighbors (e.g., “little Akelbeckâ€�) develop:
– Persistent **coughs** in winter.
– Increased risk of asthma or other respiratory problems.
– **Property/environmental impacts:**
– Neighboring houses become **dirty/sooty**, gathering black dust on walls/windows.
– **Outermost circle – City- and population-level impacts:**
– **Air pollution metrics:**
– **AQI (Air Quality Index)** and **PM2.5** concentrations **rise** significantly.
– These metrics are the standard way to compare air quality over time or across cities.
– **Health outcomes (population level):**
– Higher incidence of:
– Asthma,
– Cardiovascular disease,
– Other pollution-related illnesses.
– Likely increase in **premature mortality** and healthcare costs.
– **Visibility and aesthetics:**
– Smoggy conditions, reduced visibility.
– **Economic/social impacts:**
– **Tourism** may decline; some visitors avoid winter visits due to pollution.
– **Climate impacts:**
– Increased **greenhouse gas emissions**, contributing to global climate change.
—
#### 12. Activity 2 – Partner Exercise: Identifying New Externalities
With ~20 minutes left, the instructor launched a second activity to generalize learning beyond the two main cases.
– **Task instructions:**
– Students formed **pairs**.
– Together, they had to:
1. Think of **one additional example** of a transaction in which:
– A buyer and seller are directly involved,
– But **other people are affected** by the exchange.
– Ideally something the student or someone they know has direct experience with.
2. Decide whether this situation **involves an externality** or not.
3. Justify using the public goods framework:
– Is a **public good** involved?
– Is that good **non-excludable** and **non-rivalrous**?
– **Clarification of public good criteria (reiterated in Q&A):**
– Using sidewalks example:
– Non-excludable: very hard to **stop people** from walking on sidewalks (would require major effort to block).
– Non-rivalrous: multiple people can walk on the same sidewalk without exclusion or strong competition.
– **Example discussed in the margins: street food / snack purchase (Iskakulskaya):**
– Student mentioned buying something like **Iskakulskaya** on the street.
– Instructor posed the question:
– Does this **create an externality**?
– Are **public goods** implicated (e.g., public space, sanitation, waste on streets, smell)?
– Students were asked to **debate in pairs** and be ready to classify:
– If the only effects are on buyer/seller and their own health, **no externality**.
– If there is litter, smell, or other impacts on public space, there may be an externality mediated by public goods (e.g., streets, public sanitation).
– Instructor left this **open-ended** as a pair/partner debate, to be revisited.
—
### Actionable Items for the Instructor
#### High Urgency (Before Next Class)
– **Upload missing reading on markets and market failures**
– Post the reading that was not on e-course in time for this class.
– Clarify in an announcement whether it is:
– Required reading before the *next* session, and/or
– Primarily for reference/review.
– **Plan a brief recap of Activity 2 (externality identification)**
– Begin next class by:
– Asking a few pairs to present their examples.
– Explicitly classify:
– Which cases **do** involve externalities (and what public good is at stake).
– Which cases **do not**, and why (no public good, or no effect on third parties).
– This will help solidify the criteria and resolve any lingering confusion from the partner discussions.
– **Clarify the status of “data/privacyâ€� in the scooter example**
– Consider preparing a short note for next class that:
– Distinguishes clearly between:
– **Direct terms of a contract** (e.g., data usage consent in a terms-of-service agreement), and
– **Externalities** that fall on truly non-consenting parties.
– Acknowledge that some “consentsâ€� may be questionable or coerced, but for this course’s basic model, they will be treated as **inside the transaction** rather than external.
– **Briefly restate externality vs. intermediary distinction**
– Re-emphasize that:
– **Intermediary institutions** like banks are **not externalities** if they are paid participants in the contract chain.
– Externalities involve people or entities who are **not part of the chain of agreed exchanges** but still bear costs/benefits.
—
#### Medium Urgency (Next 1–2 Weeks)
– **Transition to policy instruments for addressing externalities**
– Prepare to move from *identification* of externalities and public goods to:
– Concrete **policy tools** (taxes, subsidies, regulation, permits, infrastructure changes) that can address scooter safety, coal pollution, etc.
– Explicit discussion of how to design these tools and what trade-offs they involve.
– **Design a homework or short assessment on externalities**
– Assignment idea:
– Ask students to:
– Pick two real-world local examples of problematic externalities,
– Map them with ripple diagrams,
– Identify the relevant public goods,
– Classify the problem as **condition vs. policy problem**,
– Suggest at least one possible **policy response** for each.
– **Potentially bring in local data/cases**
– For coal/air pollution:
– Prepare a slide or handout with:
– Bishkek **AQI / PM2.5** data from winter months,
– Health statistics (if available) or credible secondary sources.
– For scooters:
– If accessible, bring:
– Local accident statistics, or
– Example of municipal regulations (e.g., speed limits, parking rules).
– **Verify conceptual understanding of public goods**
– Consider a short in-class quiz/check where students:
– Differentiate **public goods**, **common-pool resources**, **club goods**, and **private goods** (if relevant to course scope),
– Apply non-excludability and non-rivalry carefully (e.g., sidewalks that become rivalrous under congestion).
—
#### Lower Urgency / Ongoing
– **Track attendance patterns of the three mentioned absent students**
– Note that **Ali** left or was not found during attendance and that **Altenay** and **Hadija** were not present.
– If repeated, may warrant follow-up on:
– Course participation,
– Access issues (for Hadija, who may be online/remote),
– Support needs.
– **Refine examples and visuals for future sessions**
– Clean up and standardize the scooter and coal diagrams for reuse:
– Show buyer, seller, public good, and ripple externalities in a clear schematic.
– Possibly prepare a **positive externality** example (e.g., vaccination, education spillovers, neighborhood beautification) to balance the focus on negative ones.
Homework Instructions:
NO HOMEWORK
The transcript only contains instructions for in-class activities (drawing a ripple map in your notebook and then discussing an additional externality example with a partner) and explicitly notes regarding the missed reading that “you don’t need it for today” and it will be posted “for your reference,” with no mention of any work to complete outside of class or by a future date.