THE RELATIONSHIP BETWEEN EXCHANGE RATE AND INTERNATIONAL BALANCE OF PAYMENT (THEORY AND PRACTICE IN VIETNAM)

In the presence of negative externalities, the marginal social cost of MSC ishigher than the private cost of MC.. society, the firm is producing too much.Efficient output is the level at

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATION PROGRAMS

GROUP PRESENTATION TOPIC: THE RELATIONSHIP BETWEEN EXCHANGE

RATE AND INTERNATIONAL BALANCE OF

PAYMENT (THEORY AND PRACTICE IN VIETNAM)

GROUP 4 Nguyễn Thị Ngọc Hân Chu Nguyễn Khánh Vân 11195706

Trần Thùy Trang

Lê Hạnh Trang Trần Hoàng Yến

Lê Cẩm Chi Nguyễn Hương Quỳnh

CLASS: CORPORATE FINANCE EEP 61A

Hanoi, 2022

I THEORICIAL BASIS 3

1.1 Equation of relationship between exchange rate and trade balance 3

1.2 Quantitative model 4

II RESULTS 7

II CONCLUSION

REFERENCE………

I THEORY ON INTERACTIVITYAND NEGATIVE EXTERIOR

1 Concept

Another case of market inefficiencies requiring government intervention areexternalities When the actions of one person (be it an individual or a firm) have adirect effect on the welfare of another, but those effects are not reflected in marketprices, that effect is are called externalities

An externality is the effect of a production or consumption process on a thirdparty not directly involved in that production or consumption process

2 Characteristics

Externalities occur when a process of production or consumption of certaingoods or services affects (causes damage or brings benefits) to objects directly ornot directly involved in transactions., but these impacts are not fully reflected in thecosts or benefits from a societal point of view Then, the social benefits or costs ofproducing or consuming a certain quantity of a good will not coincide with thebenefits or costs of individuals (we call it private benefits or costs) Market prices donot fully represent and reflect costs or benefits from a social point of view

The distinction between positive and negative properties of externalities isrelative: Same externality, but it is judged as good or bad depending on the point ofview of those affected

For example, a toaster oven can create a positive externality for a neighbor, ifthe neighbor can take advantage of the oven's heat for his or her own laundrydetergent business But it can also be a negative externality if the other side deals infrozen goods

Influential externalities of economic activities lead to disparities betweenindividual and societal costs or benefits because externals are not reflected in themarket for commodity prices, not necessarily true values its society Consequently,market regulation has resulted in either producing too much or producing too littlerelative to society's needs, causing external costs while market prices do not reflectall production costs It results in a market failure

Negative externalities (also known as external costs) exist when a third partyincurs some kind of cost or loss as a result of a buyer-seller transaction to which thethird party is not involved One of the best-known negative externalities is pollution.

An organization can pollute the environment by burning fuel and releasing toxicfumes that can cause public health problems

Example: Negative externalities can occur when a smelter discharges its wastes

into a river on which downstream fishermen rely for their daily living The morewaste the smelter produces, the less fish it can catch Firms have no incentive to takeinto account the exogenous costs incurred by fishermen when making theirproduction decisions

And consumption activities create negative externalities that can be clearlyseen through tobacco consumption when smokers feel good and pleasant, althoughharmful to health, but for those around them, they will feel discomfort from cigarettesmoke.

3.1.2 Inefficiency of negative externalities

Since externalities are not reflected in market prices, they can be the cause ofeconomic inefficiencies

In the presence of negative externalities, the marginal social cost of MSC ishigher than the private cost of MC That difference is called the marginal externalcost MEC In this case, the firm will maximize its profit by producing at output Q1when price equals marginal cost MC The socially efficient quantity of production isQ*, where the price is equal to MSC

The price of steel is P1, at the intersection of the supply and demand curves.The MC curve is the marginal cost of production for a typical firm As the firm'soutput changes, so does the exogenous cost to downstream fishermen Thisexogenous cost is represented by the MEC curve This line usually slopes upwardfor most forms of pollution because as the firm produces more output anddischarges more waste into the river, the additional damage to the fishing andaquaculture industries also increases society, the firm is producing too much.Efficient output is the level at which price equals the marginal social cost ofproduction – the marginal cost of production plus the marginal external cost ofdischarge On the graph, the marginal social cost curve is determined by adding themarginal and external costs at each level of output: MSC = MC + MEC Themarginal social cost curve intersects the price curve at the output level Q*

As we can see from the graph, the industry's efficient level of output is thelevel at which the marginal benefit of each additional unit of output equals themarginal social cost Since the demand curve represents the marginal utility ofconsumers, the efficient output is Q*, located at the intersection of the MSCmarginal social cost curve and the D demand curve But the industry's competitiveoutput level is at Q1 and is reached at the intersection of the demand and supplycurves MC Obviously the output of the firm (industry) is too high When

producing, each unit of output will cause a certain amount of waste to be released.Therefore, no matter what kind of pollution we consider the pollution of any firm orindustry, economic inefficiency remains a state of affairs Overproduction causes alot of waste to be discharged into the river The cause of inefficiencies is theincorrect pricing of the product The price of the above product is too low – itreflects the marginal private cost of the firm's production, not the marginal socialcost Only at a higher price P* will the firm (industry) produce the efficient level ofoutput The price paid to society by overproduction: for each unit of productionhigher than Q* The price to society is the difference between marginal social costand marginal benefit.

Comment: When there was a negative externality, the situation led to:

(1) Market efficiency remains in excess of desired social efficiency becausemarginal market costs differ from social costs because negative externalities generatemarginal external costs

(2) The market output exceeds the required output, and the market price is below the social price

(3) In the absence of appropriate interventions, markets tend to producebeyond what society generally requires That causes economic losses as marketproduction exceeds the overall efficiency of society

3.2 Positive externalities and inefficiencies of positive externalities

3.2.1 Definition

A positive externality is one when the action of one party benefits the other.Positive externalities have a good effect on the affected objects

3.2.2 Ineffectiveness of a positive externality: When there is a negative

externality, it has resulted in:

(1) Market efficiency remains below the desired level of social efficiency(2) The market output is below the required output and the market price is above the social price

(3) Causes Economic loss because the market produces below the socially efficient level

4 Solutions to restore externalities

4.1.2 Bargaining and economic efficiency:

Economic efficiency can be achieved without government intervention whenexternalities affect a small number of parties and when property rights are welldefined

For example, suppose that smelter waste reduces fisherman's profits The plantcan install a filtration system to reduce its waste, or the fisherman can pay to install

a water treatment plant

4.1.3 Costly bargaining – the role of strategic behavior:

Negotiating can take time and money, especially when property rights are notwell defined At that point, neither side can know for sure how hard it will be to getthe other to accept a common solution Negotiations can also fail whencommunication and monitoring are costly, if both sides believe they can gain agreater advantage Each side demanded more and refused to negotiate, mistakenlythinking that the other side would have to accept it anyway This strategic behaviorcan lead to an uncooperative and ineffective outcome

4.1.4 Legal solution – claim for compensation:

In many situations where there are externalities, one party that is harmed by theother party has a legal right to action If successful, the plaintiff may be entitled tomonetary damages equal to the amount of damage suffered Complaints for damagesare different from discharge fees because the aggrieved party, not the government,will be paid

When the parties can negotiate inexpensively and to the mutual benefit of both,the outcome produced will be efficient, regardless of how property rights aredetermined

⇒ The private solution may fail The private solution group is not binding butdepending on the goodwill of the parties to perform, when one party does not have thegoodwill to implement it, it will lead to the failure of the party this hypothetical group.Therefore, in some cases, government intervention is required

4.2 Public-Sector Remedies solutions

4.2.1 Group of legal administrative solutions:

- The Government can make regulations to prohibit or restrict an act by means

of legal systems and sub-law documents detailing the implementation of the law.Specifically, the emission standard TCVN 5945 - 2005 applied by Vedan company

(will be presented in chapter II on negative externality practices in the case of Vedan company).

- The Government will apply this measure when it considers that the negativeexternality is much larger than the benefit of the person causing the externality.However, the prohibition is not simple in practice For example, it is not possible toban vehicles even though all of them cause pollution

4.2.2 Group of economic measures:

4.2.2.1 Impact of taxes and subsidies:

From the graph we see that the industry's efficient level of output is Q*,reached at the intersection of the marginal social cost curve MSC and the demandcurve D But the industry's competitive output is at Q1, at the intersection point of

the demand and supply curves MC Clearly the firm's (industry) output is too high.

⇒ Therefore, the Government will tax the tax at a rate exactly equal to themarginal externality benefit MEB so that the firm (industry) will produce the efficientlevel of output Q*

From here, we can see that the impact of taxes has the following benefits on overcoming negative externalities:

Raise the price of steel and reduce output to an efficient level

-Reduce but not eliminate pollution caused by steel production

- Efficiency gains for the commune assuming that the tax rates are set correctly

- Fair benefits for people living near steel mills.

4.2.2.2 Emission standard (emission norm):

An emissions standard is a legal limit on how much emissions a company isallowed to emit If the company discharges beyond the limit, it can be fined, evenprosecuted for criminal liability, in the picture above the effective emission standard

is 12 units at point E* The company will be severely fined if the emissions arelarger than this

Emission standards ensure that the manufacturer is efficient The companycomplies with emission standards by installing waste reduction equipment Anincrease in abatement costs will result in an increase in the firm's average cost

curve (an increase of 1 equal to the average abatement cost) Firms will find itbeneficial to enter the industry if the price of the product is greater than the averagecost of production plus the cost of emissions reductions – which is an efficientcondition for the industry.

4.2.2.3 Discharge fee:

The discharge fee is the fee that will be collected for each unit of waste that thecompany discharges A $3 discharge fee will generate the firm's efficient behavior.With this fee, the airline minimizes costs by reducing emissions from 26 to 12 units

To see why, note that the 1st unit can be reduced from 26 to 25 waste units at a verylow cost (the marginal cost of further abatement is almost zero) So the firm canavoid paying the $3 per unit fee without spending much In fact, for all emissionsgreater than 12 units, the marginal abatement cost is less than the discharge charge,

so it's worth it for the firm to discharge But with emissions less than 12 units, themarginal abatement cost is greater than the discharge fee, so the firm would prefer topay the fee rather than continue to reduce emissions Thus, the total cost to the firm

is the area of the rectangle below the MAC curve and to the right of E = 12 Thiscost is less than what the firm would have to pay if emissions were not reduced atall

4.2.2.4 Transferable discharge permits:

Suppose that we want to reduce emissions but because of many uncertainties

we do not want to include a discharge fee We also want to avoid imposing highcosts on the firms that reduce emissions the most These goals can be achieved usingtransferable waste permits In this way, each firm must have a permit if it wants todischarge, each permit stipulating exactly how much waste it is allowed todischarge Any company that discharges waste without a permit will be subject toheavy fines The permits are distributed among firms, the number of permits isdetermined to achieve the maximum effective emissions, these permits aretransferable i.e marketable Under the transferable emissions permit system, thefirms least likely to reduce emissions will have to purchase permits Licenses areadded between carriers, the number of papers is determined to achieve maximumeffective discharge, these licenses are transferable i.e., marketable Under thetransferable emissions permit system, the firms least likely to reduce emissions willhave to purchase permits Thus, suppose that the two firms in the picture above arelicensed to discharge a maximum of 7 units Firm 1, with its relatively high marginalabatement cost, will pay as much as $3.75 for a permit to discharge 1 unit of waste,but the value of that permit to firm 2 is $2.50 So Firm 2 will sell its license to Firm

1 for between $2.50 and $3.75

If there are enough firms and licenses, a competitive license market will beformed At market equilibrium, the price of a license equals the marginal abatementcost of all firms; otherwise, the company will find it more profitable to buy morelicenses The emissions selected by the government will be achieved at the lowestcost Firms with relatively low marginal cost abatement curves will reduceemissions the most, and firms with relatively high marginal abatement cost curveswill purchase more permits and reduce emissions the least.

Transferable discharge permits have created a market for externalities Thismarket-type approach is attractive because it combines the advantages of a dischargesystem with the cost advantages of a discharge fee system The agency operating thesystem determines the total number of permits and thus the total emissions, just asthe emission standard system does But the ability to trade waste permits allowsemissions reductions to be achieved at the lowest cost, like the fee system

RIVER AND FINANCIAL TOOLS OF GOVERNMENT TO CONTROL NEGATIVE EXTERNALITIES

1 Introduction to Vedan

Vedan Vietnam Joint Stock Company (Vedan Vietnam) was established in

1991 in Phuoc Thai commune, Long Thanh district, Dong Nai province, east ofVietnam's largest city - Ho Chi Minh City about 70 km, on a land area of 120 ha, is

a modern biotech and food processing general industrial park, which has now putinto operation production and use works including Crystal factory powdered sugar,monosodium glutamate, modified starch factory, caustic soda plant, lysine plant,steam generator plant, PGA factory, Vedagro mineral organic fertilizer plant inpellets, system wastewater treatment system with advanced technology, Phuoc ThaiVedan Specialized Port, specialized asphalt roads, and works and infrastructure inadministrative areas, employee welfare, amusement parks entertainment