An easily lead to an increase in drunkenness and

An overuse of alcohol consumption. As common as it is alcohol
is a demerit good and therefore a form of a negative externality of
consumption. When you recall your best nights out at university, I’m sure a lot
comes to mind. This can range from 3am football chants down the road to
climbing the town centre statue to get the best photo taken. It all sounds like
a little bit of innocent fun, but the truth is that overconsuming alcohol can
easily lead to an increase in drunkenness and social disorder. In many of these
nights out the social benefit is less that the private benefit making it a form
of market failure (Pettinger, 2017). In cases like this
the market doesn’t take into account the social cost.

This graph indicates how the Marginal Private Benefit (MPB)
is higher than the Marginal Social Benefit (MSB) due to the effects of the a
negative exernality. In a free market, we’d get ‘Q’ output, however, at this
point MPB is greater than MSB. Social efficency would occur at a lower output
of ‘Qopt’ where MSB = Marginal Social Cost (MSC). This proves how overconsuming
alcohol is harmful to the rest of society and as a result, deadweight welfare
loss is created (area shaded orange) (Evangel, 2011).

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In addition, alcohol has been
scientifcally proven to damage ones liver and is belived to be a cause of
cancer once overconsumed. Although this has a great private cost it has an even
greater social cost for the following reasons. It is estimated that “alcohol misuse is costing the NHS up to £3
billion a year with more than 28,000 hospital admissions caused by alcohol
dependence or poisoning” (Unknown,
2003). A large number of ambulances are being
used to ‘Uber’ drunk people home from the hospital as doctors can’t find any
other way to get them home safetly since taxis refuse to accept them and the
police refuses to get involved (Johnson, 2016). These cases are
causing the market to inefficiently allocate its resources. Meaning it is
highly possible for an ambulance not to be available for a member of the public
who urgently needs one, causing a very serious cost to society due to
overcomption.

 

 

Enviromental
spillovers. Negative production externalities comes in many different forms of
pollution, these tend to come about as a byproduct from manufactors. Many don’t
realize, but there are external costs to the fertilisers and pesticides used in
farming. Through consumption of food and drinking contaminated water the
overall population is also indirectly exposed to pesticides. According to The Hidden and External
Costs of Pesticide Use “Many pesticides can damage human health (Damalas and
Eleftherohorinos 2011) and, for this reason, high doses over short periods
(acute poisoning) and lower doses over longer periods of time (chronic
exposure) may have an impact on human health.” (Guillemaud,
n.d.)

The social costs exceed that of human
health, but also moves on further to damage to wildlife. Earlier studies have estimated that the cost of losses
to biodiversity could amount to more than $1.1 billion every year (Anon.,
n.d.).

It is clear that pesticides bring
private benefits to those who rely on them, as they have been proven to lead to
an increase in food production. However, they impose external costs by damaging
wildlife and could cause fatal harm to those who have consumed enough pesticide
into their body. For society, this is a market failure: compared with the
Pareto-efficient allocation, the pesticide is overused causing harm to society,
and too many crops using pesticides are being produced.

In
this example we can see how pesticides has a greater MSC than MSB. If we consider the farming industry (which use pesticides),
the free market equilibrium will occur when MPB = Marginal Private Costs (MPC),
at output ‘Q’ and price ‘P’. The market equilibrium is at
point ‘A’. However, when we add external
costs, the socially efficient output is Q1, at point B.

At Q MSC (at C)
are greater than MSB (at A) so there is welfare loss. As it is, any output
between ‘Q1’ and ‘Q’ would create a net welfare loss, and the area for all the
welfare loss is the area ABC. Therefore, in terms of welfare,
markets (in this case the farming industry) over-produce goods that generate
external costs (Unknown, n.d.)

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