18 Mark Econ Essay

Topics: Externality, Supply and demand, Market failure Pages: 3 (950 words) Published: February 25, 2013
Discuss whether subsidies are the best way to encourage the consumption of products such as therapeutic gum which generate positive externalities

A subsidy is a payment, usually from the government that encourages the consumption and production of a certain good. A positive externality exists when the social benefit of an activity exceeds the private benefit. The consumption of therapeutic gum can be increased in a number of ways, one of which is subsidies to the supplier; this is where the government would pay the supplier money to make the manufacturing process somewhat cheaper that what it would normally be, this then means that the supplier can charge less for their product, which would most likely increase sales of the product, shifting the demand curve to the right.

Therapeutic gum is a Merit Good which is underprovided; this causes allocative inefficiency in that market. It has many positive externalities, one of which is underlying health problems that can be stopped or lowered by the use of therapeutic gum, things such a s smoking and unclean teeth can be helped by this. Products such as Nicotine are a good example. Because there are chewing gum products that can lower the amount of nicotine a person craves in a certain amount of time, quitting smoking becomes a lot easier, this then means that issues like Lung Cancer are less prominent, saving the NHS and therefore the government money which could otherwise be spent on opportunity costs such as education and the armed forces. Also known as Merit/Public goods. (Although in some cases education can come under the Quasi public good bracket). The supply curve of therapeutic gum could also be seen as too far left due to the suppliers themselves not actually benefiting from the externalities of their product, mainly because the externalities affect what the government would have to pay for if their product was not available.

Another market failure of therapeutic gum is information failure, as...
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