POSITIVE EXTERNALITIES OF CONSUMPTION

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

External benefits in consumption MPB = D Costs and benefits P O Q1 Quantity

External benefits in consumption MPB = D External benefit Costs and benefits P Q2 MSB O Q1 Social optimum Quantity

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

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

Externalities Summary Regardless of whether there are externalities, in a competitive market: Supply = Private MC Demand = Private MB

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

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

Lack of Public Goods 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: non-excludable and non-rivalrous (pure public good)

Public Goods 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 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 They may provide public goods themselves They may subsidize private firms, covering all costs, to provide the good

Under-supply of merit goods 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 Demerit goods are goods that will be over-provided 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 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. Sustainability is the capacity to endure. In ecology the word describes how biological systems remain diverse and productive over time. Long-lived and healthy wetlands and forests are examples of sustainable biological systems. For humans, sustainability is the potential for long-term maintenance of well being, which has environmental, economic, and social dimensions.

Common access resources 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 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 Fossil fuel consumption Pollution Poverty in less developed countries (LDC) Over-exploitation of land for agriculture

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

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