1. 7.2 Spillover Effects and Market Failure
External effects of economic activity which have an impact on outsiders who are not producing or consuming a product
Aka “Externalities”
Can take the form of costs or benefits

2. Spillover Costs & Benefits
Some things we have for free: air
Spillover Costs are negative external effects of producing or consuming a product that fall on outsiders, not market participants
e.g. Environmental Pollution
Producers making products only focus on private costs as they make supply decisions
Thus prices of products made are insufficient to pay for both private and spillover costs

3. Spillover Costs of Gasoline
$1.50 per liter for a quantity of 6 million liters of gasoline
Due to environmental damage created by both production/consumption of gasoline, there are spillover costs
S1: supply curve for only private costs of producing gasoline
S2: supply curve for public and private costs of gasoline
Without gov’t intervention, equilibrium: where D1 meets S1
To account for spillover costs, the gov’t may impose an excise tax of $1/L
Thus, supply curve shifts from S1 to S2, moving equilibrium to where D1 meets S2
Spillover Costs, Excise Tax

4. Other Spillover Effects
Taxes are a way of dealing with spillover costs
Federal & provincial excise taxes are also on alcohol and cigarettes
Taxes on these items can reduce spillover costs, such as:
The public damage caused by an impaired driver
Health-related effects of second hand smoke

5. Carbon Emissions
Policy makers take into account the future costs of higher global temperatures, and based on that, issue a carbon tax.
Carbon Tax:
Excise tax levied on a wide range of products to counteract spillover costs associated with carbon emissions.
Applied to anything whose production and consumption requires significant transportation of materials

6. Spillover Benefits
Spillover Benefits: Positive external effects of producing or consuming a product
e.g. Education, since society as a whole gains from this service
Without gov’t intervention in market for engineering education, equilibrium occurs where D0 meets S
If spillover benefits are determined to be $ per student, government can create a subsidy for students pursuing a career in engineering
Thus, demand curve shifts from D0 to D1, new equilibrium point is where D1 meets S
Spillover Benefits, Student Subsidy

7. Public Goods
Extreme Case: there are some products for which private benefits and spillover benefits cannot be separated
Public Good:
A product whose benefits cannot be restricted to certain individuals
While some consumers pay for a product, others get a “free ride”
e.g. Lighthouse – all boats benefit, regardless if they help pay for it

8. Is Internet a Public Good?
No one owns the internet, and the price of accessing the internet is not a lot, especially if you access it from school/work
There are many sites and organizations that provide resources that can help you, which gives it many of the features of a public good