Manon's Econ Blog

Archive for the ‘2.4 Market Failure’ Category

The Pope and the Vatican is strongly opposed against the use of condoms, and thus because of problems with the religious ethics (see Article). For instance, Catholic religion “steadfastly opposed to the use of condoms for any reason.” Nevertheless, the use of condoms is a positive externality of consumption as shown on the diagram below.

As shown on the diagram above, the MPB differs from the MSB, with the MSB being greated than the MPB, which creates the positive externality. The MPB differs from the MSB because condoms can stop diseases such as HIV or AIDS. If less people have the disease since they used condoms, there is a greater change that less people in general will have it, since condoms largely reduce the risk of transferring the disease.

Nevertheless, the usual goal of economies is to increase demand (so Marginal Private Benefit) and make it closer to the Marginal Social Benefit. However, the goal of the Pope and the Vatican is to shift the demand curve the other way, as shown on the diagram below.

The Pope is hoping, and advertising people to do so, to shift the demand from D1 to D2, and thus reduce the quantity of condoms consumed from Q1 to Q2. He appeals to the people following religion to not use condoms, even though it has a positive externality on society and we should try to increase demand.

The Pope, by following so strongly its religious beliefs, is going against the economy and is not beneficing the society. It inforces the gap between the private benefit and the social benefit, instead of reducing it, which is quite surprising.

When teenagers are bored and alcohol is cheap, people choose to drink in order to fight the boredom. They use alcohol as a form of entertainment, as would be going to the movie theater or shopping. The major problem with teens drinking is not only that they may develop an addiction to alcohol, but also that they may not know how to control themselves while drunk. They may provoke disturbances, noise, accidents… also called negative externalities.

Because there are negative externalities in teens drinking, the Marginal Private Benefit (MPB – teens benefit) and the Marginal Social Benefit (MSB – benefit to society) are different. The MSB is lower than the MPB because although teenagers may enjoy and have fun while drinking, the society (for example the people around) are not enjoying it as much (because of negative externalities like public disturbances or noise). The actual value of alcohol is PQ, but its real value is P*Q*. The difference between the actual value and the real value is the welfare loss (how much society looses because of these negative externalities).

It is the government’s duty to keep the value of alcohol as close to its real value as possible in order for the society to lose less. Advertisement may be a good idea to do this; for example teenagers are told that “If young people are drinking they should eat something beforehand, space their alcoholic drinks with water or soft drinks, look after their mates and, if they’re out, plan how they’re going to get home.” You cannot stop teenagers from being bored and from drinking, but you can teach them to drink in the safest conditions as possible to reduce the welfare loss.

BBC News article