Nov 17 2009
An introduction to consumption externalities from a Singapore perceptive
Published by Andrew McCarthy at 11:25 am under
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WikipediaExternalities are a common concept, that we unknowingly encounter each day.
Externalities relate to the spillover costs or benefits that arise from the consumption or production of goods and services. To put this more simply, your friend’s consumption of products can sometimes have an effect on you. For instance his increased level of education can make him a valuable asset in quiz games, or his over-indulgence in caffeine can make him a hard person to work with in class. Sometimes society would prefer more social benefits and less of the spillover costs. The concept is called a social equilirium, where price and quantity reflect the social beliefs.
Spillover costs and benefits are things that exist in many nations. Governments for instance, work hard to discourage consumption of products with substantial spill over costs such as alcohol, cigarettes or chewing gum in Singapore. They will also aim to subsidize the production of goods, which generate positive spillover costs such as public gyms, swimming pools, running tracks or national immunization schemes.
Here are a few examples from Singapore to get you thinking about this new topic.
Negative Externality of Consumption – Cars
Living on a small island a mere 50km by 60km with 5 million people brings about many problems including traffic congestion. Whilst Singapore has an excellent system of public transport, including buses and a subway system, people still demand cars in ever increasing quantities. The spillover effects of private car use are traffic congestion and pollution. The government therefore has developed an array of policies to curb the rate of car ownership.
- When you purchase a new car you must pay, an additional 100% of the cars value to the government as an indirect tax. Imagine a new Audi, retailing for $50,000 now costing $100,000 including the tax.
- When you purchase a car you must also purchase a registration permit to drive it on the roads. These permits last for 10 years, after which you must sell the car overseas. A permit is sold through an auction system. When the demand for cars is high the price of the permit rises and demand for new cars may drop. A permit for a 2 litre engine car costs about $14,000 SGD for 10 years.
- Throughout the inner city and freeway system an electronic road-pricing scheme operates. When you drive you car under one of the gantry’s you pay a small congestion tax which is deducted from a debit card in your car. When congestion is high the early evenings the congestion tax is increased from $0.50c to $1.50 on bad days. An evening commute can result is five or six congestion charges, costing drivers anything between $6 and $12.
Negative Externality of Consumption – Chewing Gum
Chewing gum is a product, that to different people, brings either a cost or benefit to society. The consumption of chewing gum can boost the production of saliva and help reduce chance of tooth decay. On the other hand chewing gum is a sign of urban decay with pavements littered with sticky blobs and grey scars.
The Singapore government feels that society would to prefer to minimize the spillover costs of chewing gum. Instead of imposing a tax on a packet of gum, it has been banned. You can not buy gum at any supermarket in Singapore. The result is pristine pavements that allows council cleaners to focus on other tasks.
Funnily enough, the nicotine gum (used to help smokers kick the habit) is legal with a prescription from your doctor.
Discussion Questions:
- Why is chewing gum not banned in every country, if it produces spill over costs?
- What are some possible alternative government interventions to reduce traffic congestion in Singapore?
- Can you apply the concept of externalities to the consumption of deodorant? Draw a graph to show the private and social equilibriums.
About the author: Andrew teaches IB Economics and IB Business Management at the International School of Singapore. He has previously taught in Wellington, New Zealand and graduated from Victoria University of Wellington. Related posts:
- Negative externalities of consumption: Britain’s “inebriated hooligans”
- Reducing negative externalities – the European market for carbon emissions
- Internalizing externalities: Zurich’s expensive garbage
- Can YOU think of a good example of a positive externality of production?
- Market Failure and the role of government in the economy ~ an introduction to Environmental Economics
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Jakeb and Einar
1. Because it creates jobs, helps economy, and even improves health by slowing decay for your teeth.
2. By lowering the price of public transportation even more and by adding a tax on oil so less people will fill up their car.
1. Chewing gum is not banned in every country even when it produces spill over costs because the chewing gum industry, similar to the tobacco industry, will be severely affected. This includes unhappy shareholders and unemployment. The other reason is that chewing gum is a good source for healthy teeth, as it helps reduce chance of decay. Thus reduces the amount of money used for medical bills.
2. Some possible alternative government interventions include increasing the price of petrol, lowering the price of public transportation, providing education about the dangers of toxic gas emissions from cars, and imposing an import quota on foreign cars. A quota imposes a limit upon the quantity of a good that may be brought into a country or economy over a period of time.
3. The consumption of deodorant will mainly have positive externalities, as when it is consumed, it will provide external benefits to third parties such as the society.
-Graph illustrated in notebook-
[...] http://welkerswikinomics.com/blog/2009/11/17/an-introduction-to-consumption-externalities-from-a-sin... [...]
1. Chewing gum is not banned in every country, because it has some benefits as well ,as listed above, by boosting the production of saliva and reduces tooth decay. Not every country see’s the spillover costs greater than the benefits.
2. The government could put taxes on petrol so that people would be less willing to pay for it or lower the prices on public transportation so that people would be more inclined to use it.
3. Deodorant can be seen as a positive externality because it benefits not only the consumer, but a third party that was not part of the market transaction. Everyone is happy
1. Why is chewing gum not banned in every country, if it produces spill over costs?
Chewing gum has negative externalities, to be sure, and therefore, its Marginal Social Cost is definitely a problem. However, depending on the country’s Marginal Social Benefit, the country might make a different choice. For example, in Singapore, the government has weighed the costs (dirty sidewalks, etc.) and the benefits (happy citizen, good breath) and has decided that in that country, they will ban gum. However, if the benefits are larger in another country (people are especially in need of gum, or are not as willing to stop), the intersection of MSB and MSC will be in a different spot, resulting in a different action by the government.
What are some possible alternative government interventions to reduce traffic congestion in Singapore?
Some possible alternative government interventions are the government could put a tax on petrol, they could make public transportation cheaper, they could make cars more expensive and they could make more public transportation, who comes often and is fast. All of those choices would lead to a decrease in demand for cars and increase in demand for public transportation and reduce traffic.
1. It is not banned in every country because the other governments have weighed the marginal social benefits and marginal social costs and they have found other ways to control the costs without completely losing the social benefits, such as the health benefits. Graphically, the intersection of MSB and MSC is placed at a different point than in Singapore, and at a point which still shows necessary benefits from the Chewing Gum market.
2. The government could subsidize public transportation and increase the taxes on oil. There could be improvements to the capital resources and more stops built to increase its effectiveness and make it more accessible.This would encourage public transportation and discourage private transportation, possibly lowering traffic congestion.