Positive Consumption Externalities: Policy Responses

Marghi & Emilie

Market Failure

• Misallocation of resources

Over Allocation

• Negative Externalities
• Qm > Qopt

Under Allocation

• Positive externalities
• Qm < Qopt

Merit Goods

• Positive consumption externalities

Demerit Goods

• Negative consumption externalities

Command Approaches

• Legislation
• Advertisement
• Education
• Direct government provision (also affects supply)

Command Approaches: Legislation, Advertisement, Education

Evaluation of Command Approaches 

• Pros
• Consequences

Market-Based Policies

• Direct government provision
• Provision of subsidies

Market-Based Policies: direct government provision & subsidies

Evaluation of Market-Based Policies

• Pros
• Consequences

Questions?