Cambridge International as and a level Economics Ebook

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Cambridge International A Level Economics

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It is further possible to distinguish when the externalities 
are the result of production or consumption decisions. 
Typical examples are:
■
 
Negative production externalities: These are spillover 
eff ects that occur as a result of production activity. 
A common case is that of most forms of environmental 
pollution. Suppose a firm disposes of chemical waste into 
a river. A production externality occurs because there 
are additional costs imposed on the community and the 
river authority who have to clean up the mess, due to the 
negative consequences of the firm’s action. There is little or 
no cost to the polluting firm. 
■
 
Negative consumption externalities: These are created 
by consumers as a consequence of their use of products 
that result in harm to others who are not involved in the 
consumption. A very relevant and topical global example is 
that of passive smoking. This causes costs to non-smokers 
in the form of discomfort and respiratory problems where 
there is extensive exposure. Another example is the 
increased CO
2
emissions that are generated by coal-fired 
power stations, aircraft , heavy industry and so on. It is now 
very clear that these are a cause of global warming.
Coal-fired power station in China
■
 
Positive production externalities: These are benefits to 
third parties and are created by producers of goods and 
services. A typical example is when, as a result of medical 
research, a new drug or vaccine is developed to combat a 
serious disease. The recipients of the medication obviously 
benefit; but there are also wider benefits to others and to the 
economy as a result of the reduced incidence of the disease.
■
 
Positive consumption externalities: Here, the benefits are 
the spillover eff ects of consumption of a good or service 
on others. This is a key argument for the provision of merit 
goods by a government. In the case of secondary education, 
those students who receive it clearly benefit from it. Their 
employment opportunities are greater and they can expect 
higher pay due to their educational background compared 
to others who left school earlier. The benefits further extend 
to their families and to future economic prospects.