Transcript Positive Externalities of Consumption Exercise

Positive
Externalities of
Consumption
Gym Membership
Market Failure
At QFM with both
consumer and
producer surplus,
total surpluses
have been
maximized. So is
more allocatively
PFM
efficient.
This is the spill over
benefits (e.g. increased
expenditure on healthy
nutrition options) that are
gained by third parties e.g.
nutrition shops or healthy
food outlets.
DWL
CS
TGT
PS
PMC
It is a market failure because it is
efficient to move from QFM to
QS because the benefits (i.e.
SMB1) exceed the costs (i.e.
PMC) for all the units between
QFM and QS. So the surpluses
can be increased by the area of
the DWL.
SMB1
PMB
QFM QS
Policy One – Subsidy
Gym Membership
DWL
Removed
DWL
PMC
PMC+Subsidy
PPR
PS
PFM
PS
SMB1
PMB
QFM QS
QPR
Efficiency and Equity
Efficiency
A subsidy on gym membership reduces the price for consumers from PFM to PS
therefore increasing quantity consumed from QFM to QS. It increases the price
received by producers to PPR from PFM therefore increasing quantity produced to
QS. It is efficient to move from QFM to QS because the benefits (i.e. SMB1) exceed
the costs (i.e. PMC) for all the units between QFM and QS. So the surpluses can be
increased by the area of the DWL.
Equity
Equity will increase as a subsidy will encourage lower income earners to join the gym.
This allows people to enjoy a service they previously could not afford and society
benefits through increased expenditure on healthy nutrition options. Therefore this is
vertically equitable as all levels of income can now afford this, (lower income people
buying power increases) not just high income earners. A subsidy is not horizontally
equitable because people who don’t use the gym but train elsewhere e.g. around a
park or at home will not benefit from the subsidy unless they choose to join a gym.
Policy Two – Regulation
Gym Membership
DWL
DWL
Reduced
e1
PS
PFM
PMC
e
PMB
QFM QS
SMB=PMB1
Efficiency and Equity
Efficiency
Making exercise compulsory is efficient because this regulation will increase the
demand for gym memberships. This is because consumers have to obey the
regulation, so some more wealthy consumers will choose to purchase a gym
membership as they can exercise in any weather, so PMB shifts to the right to PMB1.
This makes QFM move closer to QS removing the dead weight loss as the market
now operates at e1.
Equity
Making exercise compulsory is horizontally equitable as it is fair for all types of people
as consumers have the choice whether they want to join a gym or continue with their
original exercise routine. This allows low income earners to avoid high costs of gym
memberships but they are still following the rules by just going for a run around the
street. This policy is not vertically equitable as the price has increased from PFM to
PS therefore people with low incomes won’t be able to afford the memberships. Only
those high income earners will be able to.
Most Appropriate Policy
Gym Membership
DWL
Removed
DWL
PMC
PMC+Subsidy
PPR
PS
PFM
PS
SMB1
PMB
QFM QS
QPR
Best Solution
The regulation policy is the most equitable and subsidy policy is the most
efficient. The regulation may increase membership but not exercise as it will
be hard for the government to police, whereas the subsidy will increase gym
memberships and exercise. Considering this I believe the best solution is the
subsidy because it is the most efficient as it offers the best possibility for
consumers and producers. This is because we move closer to QS from QFM
removing dead weight loss as of the decreased price paid by consumers and
increased price received by producers. It is also fair to all types of income
earners (vertically equitable). Subsidies are preferred over regulations as
they let consumers decide how to internalise the spill over benefits i.e. least
costs.