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Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
    1. The meaning of externalities
    2. Types of externalities
    3. How do externalities affect allocative efficiency?
    4. Negative externalities of production
    5. Negative externalities of consumption
    6. The economic theory of traffic congestion
    7. Demerit goods
    8. Government responses - demerit goods
    9. Possible government responses to externalities
    10. Direct government provision
    11. Extension of property rights
    12. Taxes and subsidies
    13. Tradeable pollution rights
    14. Regulation, legislation and direct controls
    15. Positive externalities of production
    16. Positive externalities of consumption
    17. Merit goods
    18. Why might merit goods be underprovided by the market?
    19. Government responses - merit goods
    20. Public goods
    21. Common access resources & sustainability
    22. The tragedy of the Commons
    23. Common access resources in practice
    24. Sustainability
    25. Threats to Sustainability
    26. The threat to sustainability from the use of fossil fuels
    27. The threat to sustainability from poverty
    28. Government responses to threats to sustainability
    29. Cap and Trade Schemes
    30. Promoting Clean Technologies
    31. The 'dirty side' of cleaner technologies
    32. International responses to threats to sustainability
    33. Asymmetric information
    34. Abuse of monopoly power
    35. Inequality
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Types of externalities - Consumption

Syllabus: Describe the meaning of externalities as the failure of the market to achieve a social optimum where MSB = MSC.

The way to decide whether there is a production externality or a consumption externality is to look at the action that causes the externality. Is it a producer doing something or a consumer, consuming. For example is it that vaccines are produced (production externality) that causes the positive externality of reducing contagion or that people are vaccinated (Consumption externality).

Negative Externality of Consumption

The act of smoking destroys the health of the smoker but it also destroys the health of those around them (3rd Party effects) through passive smoking.

Positive externality of consumption

You are consuming education at this moment and you are doing it for the benefits it brings to you but there are also external benefits and society as a whole benefits from people taking more education.

Flu jabs and other Vaccinations

Any vaccination that reduces the contagion effects of viruses has external benefits or positive externalities. Even someone who does not or cannot become vaccinated has a reduced chance of catching the virus. Our local expert is Franco (investigating external effects in his EE).

Insert image of vaccination

Letīs Do Some Economics!

Try matching the following examples of externalities to each type of externality in figure 1 on previous page. Compare your answers with your neighbour - do you agree on every example?

  1. A person smoking a pipe at a football match causes the person sitting behind to start coughing.
  2. A large retail organisation attracts numerous extra customers to its store, some of whom spend money in other shops in the vicinity (maybe a shopping mall).
  3. Children are taken to school by car instead of walking or using public transport. This worsens congestion.
  4. A couple of households decide to hire a security man to patrol the street all-night throughout the week.
  5. Juggernauts (large trucks/lorries) travel through inner city areas, causing traffic congestion for other commercial road users that raises their production costs.
  6. A power station emits black fumes into the air that discolours the paintwork of nearby houses.
  7. Farmers provide pathways in the countryside that benefit walkers.
  8. A private gardener plants an assortment of beautiful plants in her front garden and enhances the environment for her neighbours and passers-by.
  9. St Paulīs School hold International Day celebration - Cars are parked all-day on the street, noise of activities is very loud, litter on the street increases.
  10. Volkswagen builds a dam to supply hydro-electric power to its factory and the local community use the dam for fishing, sailing and other forms of recreation.

See page 158 for efficient allocation at MSB = MSC