microeconomics real world examples

Real world example of a firm considering PED to maximise revenue

Uber: uses price surging to maximise revenue depending on PED at a specific time.

• On a rainy day, or after a big concert, PED for ubers will be relatively inelastic - Uber will increase its price, lose relatively few consumers and maximise their revenue

• On a day when the whether is nice, PED for ubers is much more elastic - many consumers will not mind walking. Uber will decrease its price, and gain a relatively larger number of customers, hence maximising its revenue.

RWE of governments considering PED when making decisions to optimise the effectiveness of their interventions

• Taxes: The UK has consistently raised taxes on cigarettes to reduce smoking and increase revenue. Cigarettes are highly inelastic, so behaviour only changes slightly, but revenue increases dramatically.

• Subsidies: it is more beneficial to subsidise PED elastic goods, as a relatively small government burden can lead to a larger behaviour change. An example of this would be Norway’s subsidies on electric vehicles - which have elastic PED since they are expensive and have a number of close substitutes.

Real world examples of price floors

• Minimum wage increase in the UK: legal minimum hourly age that employers must pay their workers has increased - designed to ensure that workers receive a full income and are protected from exploitation. Reduces poverty and income inequality - also improves worker productivity (efficiency wage theory). However, increased business costs often lead to higher prices for consumers and reduced profits for firms; reduced competitiveness internationally, and inflation (and obviously also causes unemployment).

• Common Agricultural policy in Europe (1970s): used price floors in an attempt to support farmers and ensure stable food supply. Guaranteed minimum prices for agricultural products at above global market rates. Incentivised overproduction by farmers, and massive surpluses accumulated - creating market distortion and requiring substantial government expenditure to purchase and store surplus products. Whilst it caused farmer income stability and food security, the CAP caused a lot of surplus and waste; and high costs for consumers and taxpayers.

General evaluations of price floors

• Positives: producer protection and income stability, encouragement of production and security, addressing market power imbalances, social and rural development, disincentivising consumption of demerit goods

• Negatives: market surpluses and resource waste (managing these surpluses often requires costly government purchases), inefficiency and and deadweight loss (distortion of market signals, inefficient resource allocation), higher costs for consumers and taxpayers, potential for government failure

Real world example of price ceilings

Rent controls in New York: aiming to prevent landlords from exploiting renters with excessively high prices, and making housing unaffordable. The rent controls help some low-income tenants to secure stable housing at rates below market value, preventing displacement and maintaining diverse communities. On the other hand, rent controls led to a housing shortage, decreased the supply of available rental units, and reduced the incentive for landlords to maintain and improve properties. The rent controls achieved the short term goal of consumer protection but long-term damage/welfare loss undermines this.

General evaluations of price ceilings

• Positives: consumer protection and welfare - makes essential goods affordable for lower-income households, promoting equity and addressing market failures arising from income inequality. Increases consumer surplus, prevents price gouging during emergencies, may encourage producers to become more efficient to maintain profitability.

• Negatives: shortages and rationing: excess demand, necessitates non-price rationing mechanisms like queuing or waiting; emergence of black markets; reduced supply and quality deterioration (producers may cut corners or stop supplying to maintain profitability); allocative inefficiency

Real world example of indirect tax

Excise duties on cigarettes in the UK: added to the price paid by consumers (because of inelastic PED) and collected by producers, who remit it to the government. Reduced negative externalities by raising the price of cigarettes (discouraging consumption), raises government revenue, flexible and convenient, targets harmful consumption. However, these taxes are often regressive (inequitable), they encourage black markets, raise prices for consumers, and may cause job losses.

General evaluations of indirect taxes

Advantages: correct market failures (reduce overconsumption, internalise externalities), raise government revenue, convenient (easy to collect - can’t really be evaded), flexible

Disadvantages: potential regressive impact (take up a larger percentage of income from lower income individuals than from higher-income ones, further reducing their purchasing power), potential for black markets and evasion, higher prices, reduced consumer surplus, effectiveness depends on PED

Real world examples of subsidies

Agricultural subsidies provided to farmers inn the United States (corn, wheat, cotton and rice). Aim to supplement farmers’ incomes, stabilise food security, and influence the production of certain crops or livestock. Provides more income stability to farmers (protecting them from price volatility), food security (supporting domestic production), investment and modernisation, and rural development.

Can cause overproduction and waste, market distortion, global inequality, exacerbate inequalities between small and large firms, and come at a high fiscal cost.

General evaluation of subsidies

• Advantages: correcting market failure (particularly for positive externalities - encourage greater production and consumption), promoting merit goods (more accessible and affordable), supporting key industries and employment (especially during economic downturns), income redistribution (making goods affordable for lower-income households to reduce inequalities), encourage innovation

• Disadvantages: resource misallocation and inefficiency (distort market signals, keeping inefficient firms in business), high fiscal costs (very expensive for governments), dependency and lack of incentive (risk of becoming inefficient), environmental risks, potential for government failure.

Real world examples and general evaluation of direct provision of services

• Healthcare (UK, NHS) - public goods (street lighting, defence) - anything where there is little incentive for the public sector to provide them because of the free rider problem

• Advantages: addresses market failure - ensures that essential goods and services with positive externalities are accessible to all; promotes equity - universal access helps reduce inequality and ensures that vulnerable groups are not excluded from basic services; increased consumption of merit goods yields wide social benefits

• Disadvantages: high fiscal cost - expensive for governments; potential inefficiencies (bureaucracy); quality variation; long waiting times; rationing

Real world examples and general evaluation of command and control regulation

• Environmental regulation (US clean air acct): the government set legal limits on pollutants and required firms to install specific pollution control technologies

• Advantages: clear standards and enforcements; rapid impact; essential for common pool resources

• Disadvantages: lack of incentive for over-compliance (actual improvement); inflexibility; administrative burdens; loopholes and exceptions; potential for regulatory capture (powerful industries influence regulations)

Real world examples of a positive externality of consumption

• Vaccines: the positive third party benefit is herd immunity - allowing vulnerable individuals to free ride

• Education: the positive third party benefit is economic growth caused by people getting higher skilled jobs

Real world examples of positive externalities of production

• Bees/beekeeping: the beekeeper produces honey, and it reduces costs for farmers as the bees pollenate the plants and it means that the farmers don’t have to do it

• Infrastructure: lowers costs to businesses by lowering their transportation costs

• Research and development: creates new technology which lowers other firms costs of development

Real world example of a personal information failure

Cigarettes, alcohol and drugs

Real world example of a societal information failure

Vapes, social media and phones

Real world examples of common pool resources

• Deforestation in the amazon rainforest

• Overfishing in China and Japan

Rational overconsumption, lack of accountability, resource scarcity

Real world example of a pigouvian tax on a negative externality of production

Carbon taxes: implemented in many countries, including Sweden and Canada, implementing carbon taxes on fossil fuel producers and polluting firms. The aim is to internalise the external cost of greenhouse gas emissions (move MPC to MSC), in order to avoid the negative spill over effects of greenhouse gas emissions, which contribute to climate change and impose health and environmental costs on society – carbon emissions decrease from Qe to Qopt. Evidence has shown that carbon taxes reduce emissions by making polluting more expensive, encouraging firms to adopt cleaner technologies or reduce output – however, the effectiveness depends on how well the tax rate matches the external cost, which is difficult to calculate. There can also be unintended consequences such as high consumer burden (especially impacting low-income households), there may also be lobbying by affected industries.

Real world example of a pigouvian tax on a negative externality of consumption

Tobacco taxes: implemented in the UK (excise tax) to address the external costs of smoking, such as increased public expenditure on healthcare and harm from second-hand smoke. The aim is to disincentivise consumption towards the social optimum through increasing the price (most of the tax burden falls on the consumer due to price inelasticity of demand). This is particularly effective among price sensitive (low income) consumers like teenagers, and the revenue can be used to fund healthcare or education campaigns. However, the effectiveness is reduced by illicit trade (smuggling), and the fact that demand is inelastic, so consumers continue to buy as they are addicted – also there are concerns about the tax being regressive.

Real world example of a subsidy on a positive externality of production

Renewable energy subsidies in Australia. Aiming to reduce the costs of producing clean energy, encouraging firms to invest in and expand renewable generation. These have significantly increased the share of renewables in Australia’s energy mix, but they come at a high fiscal cost, there are risks of inefficiencies (firms may become reliant on subsidies and have less incentive to innovate), and it is difficult to measure the true external benefit and governments risk over or under subsidising.

Real world example of a subsidy on positive externalities of consumption

Education subsidies in Finland. This has substantial societal benefits, including higher productivity, lower crime rates and greater economic growth, but these have a high fiscal burden, potential diminishing returns (additional spending may not yield proportional social benefits), and equity concerns, since, if not targeted, subsidies may disproportionately benefit higher-income groups (since high-income consumers may use up more of the subsidised good, or it may be inaccessible to low-income consumers).

Real world example of legislation on negative externalities of production

The Clean Air Act in the US – a response to events like the London smog, and a form of command and control regulation. Explicit limits set on harmful pollutants (specifically air polluting particulates that came from factories). Industries are requires to install and upgrade technology to ensure their emissions remain within these set limits. Enforcement is achieved through monitoring and penalties for non-compliance (basically internalising the societal cost of polluting). The clean air act has significantly improved air quality, and hence the incidence of respiratory disease, firms have also been incentivised to innovate. However, command and control regulation is often too rigid, and smaller firms tend to suffer more greatly as they struggle to adapt. Furthermore, monitoring firms emissions is also a costly job for the government, preventing an opportunity cost.

Real world example of international agreement on negative externalities of production

The Paris Agreement (2015) – aiming to globally curb greenhouse gas emissions, as no single nation shoulders the costs of these alone – indirectly enforces producers to account for the environmental costs of their operations. Operates on a flexible, non-binding framework, where each country sets its own Nationally Determined Contributions to shift supply towards the MSC. The agreement lacks enforcement mechanisms, but relies on global peer pressure and periodic transparency reviews. The strengths of international agreements are their global scope, their flexibility and their dynamic process – arguably making them more equitable than strict legislations. However, international agreements are difficult to enforce, some countries may free ride on the benefits.

Real world example of regulation on negative externalities of consumption

Mandatory labelling on sugary drinks (Singapore’s nutri-grade system) – aiming to correct the negative externalities caused by the overconsumption of sugar. Through the government intervening by mandating clear nutritional labels, they are basically trying to correct the information failure surrounding the demerit good. The strengths of this is that it preserves consumer freedom, but corrects the information failure – it also incentivises the market to reformulate and obtain a better label rating. However, the success of the labelling depends on consumer response – individuals might be indifferent, or find the labels confusing, cultural trends might be overpowering and different demographic groups may react differently.

Real world example of tradable permits on negative externality of production

 The emissions trading system in the EU – a market-based intervention designed to address the negative externalities of greenhouse gas emissions by placing a cost on emitting CO2. CO2 emissions impose health, environmental and economic costs on society that are not borne by the producer, and the ETS attempts to internalise these external costs. The ETS sets an overall cap on the total amount of greenhouse gases that can be emitted in different sectors, and they give out allowances (each allowance = 1 tonne of CO2), these allowances can be freely traded. This system ensures an overall limit on emissions while using market forces to discover the most cost-effective carbon reductions, and gives an incentive for innovations – firms are motivated to develop cleaner technologies and processes to reduce overall emissions and potentially profit from selling surplus allowances. This intervention ensures that overall emission reduction targets are met at the lowest possible cost, it helps provide a predictable pathway toward environmental targets. On the other hand, the market for emissions allowances can be volatile – this can create uncertainty for firms making long-term investment decisions; furthermore, if the government set too many permits, the intervention is completely ineffective, some firms just move abroad and offshore their emissions.

RWE of education on negative externalities of consumption

Anti-smoking campaigns – the CDC’s (Centre of disease control and Prevention - America) tips for former smokers campaigns – reduced smoking rates by showcasing real health consequences, leading to 16.4 million quit attempts. Exposure to ads increased quit intentions and reduced relapse rates – correcting the personal information failures associated with demerit goods like smoking. This reduced cigarette consumption by 12% in some cases – decreasing the welfare loss and shifting consumption towards the socially optimum output.

RWE of education on positive externalities of consumption

The US COVID-19 vaccination campaign promoted immunisation’s societal benefits. Public health messaging emphasised herd immunity, aligning private benefits with social benefits. MPB shifted rightwards, closing the underconsumption gap, and causing long-term behavioural changes.

RWE of education on negative externalities of production

Germany’s GOAL project (pollution education for firms) – combined awareness-raising with practical measures like emissions maps and green certifications. These efforts tried to reduce overproduction by highlighting the external costs, and encouraging cleaner practices – however, without strictly limiting firms or providing incentive to change their habits, there is limited evidence of their effectiveness.

RWE of education on positive externalities of production

Norway’s EV campaigns, emphasising the societal benefits. Led to increased R&D collaboration and green investment – but again, limit efficacy without financial/legal intervention too.

RWE of collective self governance on negative externalities of consumption

Beach plastic clean-ups – where communities organise beach clean-ups to mitigate plastic pollution. Volunteer groups in coastal regions regularly remove plastic waste, reducing harm to marine ecosystems and tourism economies.

RWE of direct government provision on positive externalities of consumption

NHS – offers free healthcare, addressing underconsumption of preventative care. This reduces disease spread and improves workforce productivity, generating external benefits exceeding private gains. This eliminate price barriers, increasing consumption to Qopt. The long-term societal gains generally outweigh the opportunity cost, but it is persistent, and these systems do take a lot of government expenditure to upholds, and they can suffer from underbudgeting, and thus be poor quality.

RWE of direct government provision on positive externalities of production

Government-funded R&D. NASA’s research on space technology spurred innovations like GPS and medical imaging, which now benefit private firms. Governments are able to capture external benefits that private firms would underinvest in. It takes high upfront costs, but avoids market distortions and ensures universal access. However, priorities may shift with administrations, destabilising long-term projects.