POSITIVE EXTERNALITIES OF CONSUMPTION Positive Externality Benefits of

POSITIVE EXTERNALITIES OF CONSUMPTION

Positive Externality: Benefits of Consumption • External benefits of consumption – MSB > MPB

Costs and benefits External benefits in consumption P MPB = D O Q 1 Quantity

External benefits in consumption Costs and benefits External benefit P MSB MPB = D O Q 1 Quantity Q 2 Social optimum

Examples of Positive Consumption Externalities • • • Education and training Public transportation Health education Preventive medicine Investment in housing

Potential Solution Positive Consumption Externalities • Subsidy – Public education of children • Advertising – Government can advertise the benefits of consumption externality goods to encourage consumption • Legal requirements

External cost P P Costs and benefits (£) External costs and benefits in consumption External benefit P P MSB MPB MSB O Q 2 Q 1 Car miles (a ) External costs O Q 1 Q 2 Rail miles (b) External benefits

Private and Social Costs – Negative Externalities Social Costs Private = + Costs External Costs Private and Social Benefits-Positive Externalities Social = Private + External Benefit

Externalities Summary n Regardless of whethere are externalities, in a competitive market: Ø Supply = Private MC Ø Demand = Private MB

1. Identify an externality that could be associated with each of the following: a) A dairy factory accidently spills litres of milk into theuses, adjacent river. Loss 70, 000 of fishing, recreational clean water b) Households instal dual-flush toilets. Water savings for community c) A drunk driver loses control and severely injures a rehabilitation, pedestrian. Hospital care, ongoing family, etc d) A beekeeper establishes hives next to apple orchards. Pollination of apple trees 2. Classify each of the following as either: a positive externality of consumption or a negative externality of consumption a) Plastic six-pack holders. negative b) Immunisation injections for meningococcal disease. positive c) Solvent sniffing by teenagers. negative d) Post-secondary education. positive

3. Electricity generated at coal-burning stations is likely to produce thick smoke and gases. Draw a well-labelled graph to show the: a) the costs of production to the owners b) the spillovers to society MC MSC Pe, Qe and social equilibrium Ps, Qs c) the private equilibrium MB/MC MSC MC Ps WL Pe MB Qs Qe Q

Lack of Public Goods n n n Public goods are goods that would not be provided at all in a free market. Public goods are goods that are of benefit to society Characteristics of public goods: nonexcludable and non-rivalrous (pure public good)

Public Goods n n Non-Rivalry – more than one person can enjoy the benefits of the product at the same time Non-Excludability – no way to exclude anyone from the product, regardless of whether they pay for it or not

Lack of Public Goods n n A good is non-excludable if it is impossible to stop other people consuming it once it has been provided A good is said to be non-rivalrous when one person consuming it does not prevent another person from consuming it as well

Examples of Public Goods

Government intervention n n They may provide public goods themselves They may subsidize private firms, covering all costs, to provide the good

Under-supply of merit goods n n Merit goods are goods that will be underprovided by the market, because of this, they will be under-consumed (i. e. education, healthcare, sports facilities and the opera) Government may provide the merit goods or subsidize them depending upon how important they think the merit good is

Over-supply of demerit goods n n Demerit goods are goods that will be overprovided by the market, because of this, they will be over-consumed (i. e. cigarettes, alcohol, hard drugs, and child pornography) Governments may attempt to reduce the supply and/or the demand by making them illegal and ban them completely or put a heavy tax on these goods

Common access resources n Lack of pricing mechanism for common access resources means that these goods may be overused/depleted/degraded as a result of activities of producers and consumers who do not pay for the resources that they use, and that this poses a threat to sustainability.

Common access resources n n Common access resources such as fisheries often result in over-exploitation, due to their non-excludability. Recent attempts to ‘privatize the commons’ have helped achieved a more sustainable level of fish harvest in certain countries.

Example: Common access resources n n Common access resources such as fisheries often result in over-exploitation, due to their non-excludability. Recent attempts to ‘privatize the commons’ have helped achieved a more sustainable level of fish harvest in certain countries.

Other externalities that threat sustainability n Fossil fuel consumption n n Pollution Poverty in less developed countries (LDC) n Over-exploitation of land for agriculture

Potential solutions to sustainability problems n Extension of property rights n n n Encourage protection & management of the scarce resource (have a price mechanism) Carbon taxes Tradable permits n Encourage cleaner production

Other Forms of Market Failure n Factor immobility n n Inequality n n n Land, labor and capital – immobile Income inequality Government & policy failures Short-termism n Pursuit short-term objectives can create longterm problems