Page 365 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 2. External diseconomies of production: External diseconomies of production bring changes in
personal and social expenses and benefits when the production of any service or commodity
by a firm has a significant effect on other firms in business. The example provided by Professor
Pigou regarding air-pollution clarifies these differences. Assume that a factory is situated at a
rich populated area and produces smoke. The smoke emitted from the factory spoils the health,
house, household items, and clothes. As a result of this, the residential expenses increase several
manifolds like washing the clothes, cleaning the household goods and cleaning the house and
health expenses. These are social costs for which the factory never compensates the residents
and thus gains. Thus, personal costs are less than social costs and the benefits of factory are
more than social benefits because the owner of the factory escapes from the work done by the
residents and therefore earns personal profit. Thus, in comparison to personal costs and benefits,
social costs are more and benefits are less.
3. External economies of consumption: External economies of consumption are obtained from
the delight of different consumers´ anti-market correlation. An increase in the consumption
of commodity or service, which impacts the structure and desire of consumption of other
consumers, is external economies of consumption. When a person buys a television set, then
the contentment of his/her neighbours increases when they and their children watch various
programmes. This is an example of external economies of consumption where social benefits
are more than personal benefits and social cost is less than personal cost because the owner
of the television set does not earn anything from the neighbours—nothing is gained in lieu of
watching programmes.

4. External diseconomies of consumption: When a commodity or service used by a consumer
has a significant effect on the structure and desire of the consumption of other consumers
then it is external diseconomies of consumption. Diseconomies of consumption, in particular,
are produced from clothing related to fashion and consumer goods. When a rich lady in a
locality follows a new style of dressing then the old style of dressing is not only criticized by
this lady but also by other ladies who try to imitate the style of dressing followed by the rich
lady. This way the social costs are more than the personal costs and social benefits are less
than the personal benefits. Those people who are not capable of adopting the consumption
structure of their rich neighbours often experience the emotions of displeasure and envy
as a result of which their productive ability is minimized and the social and personal costs
and benefits see lot of differences. Another example is the noise nuisance created from
loudspeakers.

5. Public goods: Differences in the social and personal benefits could be because of public
goods which have been condemned by Pigou. Professor Baumol has defined public goods as
something which when used by one person does not minimize the values of the commodity for
another person. The consumption of public goods is equal. Some of the services provided by the
government like national security, security of people, judiciary, disease control, etc. are public
goods. Their benefits are undivided. This is available to each person irrespective of whether
they give anything for this or not. That is why they do not come under exclusion principles.
Another feature of public goods is that their benefits are available at zero margin cost. That is
their benefits can be provided to anyone without any additional cost. For example, the cost to
provide justice does not increase when another person demands justice from court. The third
feature of public goods is that they bring changes in external and social and personal benefits.
Externalities are produced when one person provides public goods then he provides benefits
to other people and thus produces social benefits which is more than the personal benefits. For
example, when a person, by taking initiative, sets up an electricity pole in the street near his
house, then all other residents gain from it. As a result of this, the social benefit is more than
the personal benefit.

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