1. POSITIVE EXTERNALITIES OF CONSUMPTION

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

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

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

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

6. 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

9. 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

10. 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 = +

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

12. 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

13. 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

14. 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)

15. 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

16. 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

17. Examples of Public Goods

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

19. 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

20. 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

21. 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.

22. 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.

23. 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.

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

25. 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

26. 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