Is Rave Culture Everything It Is Set Out To Be?

 

Imagine a world where everyone worked together to form a collective, a world in pursuit of belonging and inclusivity, a world chasing euphoria through music and dance. This is what defines rave culture. Spread by word of mouth, misfits and music lovers overwhelmed warehouses, branching out across the underground scene with party drugs fueling the nights. Raving has since been popularised, with like-minded people gathering to witness the glory that the free party culture holds. However, behind the neon lights, there comes a cost, but to whom does this cost lie?

 

The Welfare Loss of the Afterparty

In a free market, all agents operate to benefit themselves, exchanging information on their needs, wants, and capabilities. Subsequently, the market reacts to changes in this information, resulting in fluctuations in price and quantity demanded. However, this doesn't always reflect the full cost of producing and/or consuming a service. There are hidden costs to third parties when a service is produced or consumed that economists call negative externalities. When ravers engage in the free party movement, they find joy through community; however, this forms large crowds prone to littering in local areas and damaging the environment. The accumulation of litter forms a divergence between the marginal private cost (MPC) that firms cover and the marginal social cost (MSC) that the public endures—what Arthur Pigou described as “the divergence between private and social net product”[1]  (Pigou, 2002). Thus, a market failure from a misallocation of resources unveils, which is not represented in the balance sheet, also known as a Pareto inefficiency.

Cigarette butts and packaging are found in 81% of deprived areas. Due to the unsightly litter, local economies struggle to grow and continue to decline, taking with it the morale of stakeholders (Keep Britain Tidy, 2025). Cigarette companies don't take accountability for the social costs that arise and the psychological toll they cause. They don't take full accountability for their actions; they just pay the price indicated by the market for the sole purpose of maximising profits instead of welfare.

(Keep Britain Tidy, 2025). Is this relatable? In and around all rave venues, a flurry of litter can be found; those who litter don't take responsibility for it, and the rave organisers don't cover the cost of the externality either. Consequently, it is the community that is forced to pay the price, and if left untreated, may contribute to the economic decline in deprived areas.

This process of littering happens regularly in public spaces and rave venues across the world, with one of the most famous cases being The Brighton Beach Boutique II (2002). This was a free event on Brighton Beach, which was non-excludable to the public and non-rivalrous, as there wasn’t a limit to the number of people who could enjoy this experience. With so many positives, what could go wrong?

The event was initially planned for 60,000 attendees, escalating to 250,000 people gathering to witness Fatboy Slim in one of the biggest raves of the decade (Coll, 2022). This is where the cracks began to form, with no clear ownership, and people weren’t held accountable for their actions. The market failure began to show its ugly face. There was a shared view that littering a single item has little to no impact; however, as this behaviour was repeated amongst thousands of ravers, it became a prominent societal issue known as the free-rider problem. The aftermath led to mass amounts of litter scattered across the area, with the clean-up costs imposed on the local council and community. This is a result of the tragedy of the commons, leading to a systematic failure with the under-provision of cleanliness and increased environmental degradation. People have little motivation to safeguard these areas as they belong to everyone but no one in particular (Hardin, 1968).

Correcting Market Failure in Rave Events

The Coase theorem provides an elegant solution to the negative externality associated with rave culture, arguing that when property rights are clearly defined and negotiation is possible, parties involved in an externality can reach an efficient solution without government intervention (Parisi, 2008). In this case, local councils or owners of public spaces could establish agreements with event organisers before a rave takes place. For example, organisers could be required to fund cleanup crews, provide sufficient waste bins, or pay refundable deposits that are only returned once the site is restored to its original condition. This would force organisers to bear part of the social cost created by littering, rather than leaving taxpayers or local communities to absorb the burden. In events like the 2002 Brighton Beach rave, where large amounts of rubbish were left behind, such arrangements could have reduced the damage by making organisers accountable for post-event waste management.

Although the Coase Theorem offers a practical solution for littering, it is difficult to apply to other negative externalities caused by rave culture, such as noise pollution. Due to the high density and transient nature of the crowds, negotiating the social cost becomes complex as it is impractical to identify the affected individuals and determine the extent of the impact (Schneider, 2022).

A more effective solution is a combined strategy with other policies like a Pigouvian tax, which makes those responsible pay for the external cost they create. This could involve charges on single-use items like plastic cups, encouraging organisers and attendees to reduce waste. Unlike the Coase Theorem, this approach is more practical for large events where negotiation is difficult. The revenue generated can also fund cleanup and environmental restoration, helping to offset the damage caused.

 

When Celebration Comes at a Cost

If short-term enjoyment is prioritised over its wider social costs, the consequences will fall back on society. What seems harmless—such as littering—accumulates into long-term damage to shared spaces and communities. While solutions like the Coase Theorem and Pigouvian tax offer some accountability, they are not always enough. Ultimately, balancing enjoyment with responsibility is key to preventing these hidden costs.

References

 

Coll, T. (2022). 20 years on from Fatboy Slim’s mammoth Brighton beach party. [online] Far Out Magazine. Available at: https://faroutmagazine.co.uk/fatboy-slim-beach-party-20-years-on/ [Accessed 24 Apr. 2026].

Hardin, G. (1968). The Tragedy of the Commons. Source: Science, New Series, [online] 162(3859), pp.1243–1248. Available at: https://pages.mtu.edu/~asmayer/rural_sustain/governance/Hardin%201968.pdf.

Keep Britain Tidy. (2025). A Rubbish Reality Our litter Problem and Why is Matters. [online] Available at: https://www.keepbritaintidy.org/sites/default/files/2025-11/KBT%20Rubbish%20Reality%20Report%20Jan%2025.pdf#:~:text=Smoking%2Drelated%20litter%20(cigarette%20butts,survey%20was%20carried%20out%20in [Accessed 24 Apr. 2026]

            Parisi, F. (2008). Coase theorem. The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-58802-2_251

Pigou, A.C. (2002). The Economics of Welfare. New Brunswick, N.J. ; London Transaction Publ. C.

            Schneider, N. (2022) “Internalizing Environmental Externalities and the Coase Theorem”, World Journal of Applied Economics, 8(2), pp. 93-100. doi: 10.22440/wjae.8.2.4.

 

Airbnb’s Hidden Costs: How short-term lets create long-term problems

 Airbnb looks like a win-win, and the numbers back up its popularity, growing from 2.1 million listings in 2016 to over 8 million in 2024 (Kumar, 2025). Homeowners make extra money, and travellers get somewhere to stay cheaper and more flexible than a hotel. But in the cities where Airbnb has grown fastest, rents have gone up, long-term housing has become harder to find, and neighbourhoods have changed alongside the sound of rolling suitcases. The backlash makes sense once you see what's actually going on. This is not really a tourism problem, it's a textbook negative externality. The guest pays, the host earns, but neither of them pays for the costs imposed upon everyone else. This blog explains how that happens, shows the evidence, and asks whether current policy can actually fix it.

Source: (BBC, 2022)

 

Negative externality in Airbnb market

Hosts have strong incentives to use Airbnb because short-term letting is flexible, can adjust prices in peak tourist seasons and offers higher returns than long-term tenancies. Tourists have more choices of accommodation and sometimes offer cheaper prices than hotels. Therefore, both hosts and tourists benefit from the transaction and it seems like a win-win exchange. However, not all people gain from this transaction. When more properties are shifted from long-term to short-term use, the supply of long-term housing falls, pushing up rents for local residents.

 

Therefore, the short-term market price only reflects private benefits but not full social costs. As a result, the level of output for short-term lets exceeds the socially efficient level, resulting in overproduction and negative externality in production. The negative externality in consumption cannot be ignored as well. Locals may face problems such as noise, overcrowding and safety concerns. Together, these effects show how externalities can distort market outcomes.

 

Figure 1 below illustrates how Airbnb can create hidden costs in the housing market. In the private market, the equilibrium point is Q_pc, which shows that hosts only consider their own private costs and expected returns. However, this equilibrium point does not include some external costs imposed on local residents. Once these external costs are taken into account, the social optimal point falls to Q*.

Figure 1: Without regulation, the Airbnb Market produces a deadweight loss

 

Real Life Externalities

There is growing evidence that the theory plays out in reality. A study of Portugal found that a 1 percentage point increase in Airbnb's market share was associated with roughly a 3.7% increase in housing prices (Franco and Santos, 2021). In Barcelona, between 2009 and 2016, Airbnb was found to be responsible for a 4% increase in rents (Garcia-López et al., 2018), and in New York City, when Airbnb listings doubled, property values increased by 6% to 11% (Sheppard and Udell, 2016). The pattern is clear: in high-demand areas where housing supply is already tight, Airbnb places upward pressure on costs, and those costs land on locals who take no part in any booking transaction - exactly the hidden cost to third parties shown as MEC_p in Figure 1. It is a cost Airbnb hosts and guests don’t pay, but neighbours do.

 

Policy Solutions

So why doesn’t the market sort this out on its own? The Coase theorem suggests that if property rights are clear and bargaining is cheap, the people affected by an externality can negotiate their way to an efficient outcome without the government getting involved. The problem is neither condition works here. No one has the right to a quiet street or affordable local rents, and even if they did, it would be near impossible to get every resident to bargain with every Airbnb host in their respective area. The transaction costs are simply too high, so the external costs stay invisible to the hosts and the market keeps overproducing short-term lets, which is why government intervention is required.

 

Governments have two main levers for dealing with this kind of negative externality: cap it or tax it. A correctly set tax works by raising the cost of operating a short-term let by exactly the marginal external cost (MEC_p). This lifts the private cost curve (S=MPC) up until it rests on top of the social cost curve (MSC), which collapses the deadweight loss triangle (DWL) to zero in Figure 1 and shrinks the market quantity from Q_pc to the socially efficient quantity Q*. An example of this is in Edinburgh, where from 24 July 2026 there will be a 5% tourist tax added on to the cost of short-term accommodation (BBC, 2026). Although the tax is legally paid by guests, the burden is shared with hosts through lower nightly revenue, opening a wedge between what guests pay and hosts receive, which nudges the market down toward Q*.

 

A cap instead restricts quantity rather than price, pushing the market quantity (Q_pc) down toward the socially efficient quantity (Q*). Caps target commercial-style lets that do the most damage to long-term housing supply (london.gov, 2025). An example of this is London, where there is a cap of 90 nights per year for a listing without needing planning permission (Ucha Vekua, 2025).

 

Both policies are better than a blanket ban. A ban wipes out the externality, but also wipes out every short-term let a tourist would have valued and every extra pound a host would have earned above what they would receive from long-term letting. The aim of good policy is not to eliminate short-term lets, but to move the market quantity under perfect competition(Q_pc) toward the socially efficient level (Q*), where there is no longer any deadweight loss. The harder question to answer is whether Edinburgh's 5% tourist tax or London's 90 night cap actually match the marginal external cost (MEC_p) they are attempting to offset. Both policies were produced through political negotiation rather than by calculating the externality, so while each moves the market in the direction of the socially efficient quantity, there is no guarantee that either policy lands perfectly on Q*.

References:

BBC (2022). Green light for Edinburgh short-term lets controls. BBC News. [online] 24 Feb. Available at: https://www.bbc.co.uk/news/uk-scotland-edinburgh-east-fife-60478178.

BBC (2026). Councils given power to charge ‘flat fee’ tourist tax. BBC News. [online] 24 Mar. Available at: https://www.bbc.co.uk/news/articles/c1w4qjlzxgjo.

Franco, S.F. and Santos, C.D. (2021). The Impact of Airbnb on Residential Property Values and Rents: Evidence from Portugal. Regional Science and Urban Economics, 88, p.22. doi:https://doi.org/10.1016/j.regsciurbeco.2021.103667.

Garcia-López, M.-À., Jofre-Monseny, J., Martínez Mazza, R. and Segú, M. (2018). Do Short-Term Rental Platforms Affect Housing Markets? Evidence From Airbnb in Barcelona. SSRN Electronic Journal, 119. doi:https://doi.org/10.2139/ssrn.3428237.

Kumar, N. (2025). Airbnb Statistics 2025: Users & Revenue Data. [online] Demand Sage. Available at: https://www.demandsage.com/airbnb-statistics/.

london.gov (2025). Guidance on short term and holiday lets in London. [online] London City Hall. Available at: https://www.london.gov.uk/programmes-strategies/housing-and-land/buying-and-owning-home/guidance-short-term-and-holiday-lets-london.

Sheppard, S. and Udell, A. (2016). Do Airbnb properties affect house prices? [online] Available at: https://web.williams.edu/Economics/wp/SheppardUdellAirbnbAffectHousePrices.pdf.

Ucha Vekua (2025). What is the 90 day rule on Airbnb? [online] Wise. Available at: https://wise.com/us/blog/what-is-the-90-day-rule-on-airbnb.

A Tale of Two Lungs and One Bad Decision

Vapes were once marketed to help smokers wean off their habit and were seen as a “healthier” alternative, according to the NHS (2023). However, recently there has been a more accessible and appealing type of vape - disposable ones. The affordability, colourful packaging, and abundance of flavours kindle memories of being in a sweet shop as a child. It's not difficult to see why younger audiences would be attracted to consuming such a good. Among 18–24 year olds, 57% of e-cigarette consumers use disposable vapes (Action on Smoking and Health, 2023). Alarmingly, this rises to 69% for ages 11-17 (Mediaofficer, 2024). The UK government has proposed banning the use of them completely by April 2025, but is this the best decision? It’s a question that ignites curiosity amongst many, and economists may have the answer.

The Problem with Vapes

The long-term health effects are unknown, and cases of ‘popcorn lungs’ have risen due to high nicotine concentrations, raising questions about the risks associated with vaping. This is where ‘internalities’ come into play. Economists describe this as a cost imposed on the consumer that is not considered during consumption; in this case their health (Reimer & Houmanfar, 2017).

Not only does vaping harm those consuming them, but also the rest of society. This is known as a “negative consumption externality,” whereby individuals not involved in the purchase of the goods are negatively impacted. When these externalities exist, we arise at a situation known as market failure, where the market fails to reach a resourceful outcome.

Vaping causes a number of negative externalities; second-hand smoke poses health risks to others and has health impacts on consumers, causing increased strains on NHS services, which further burdens the taxpayer. Finally, vapes release toxins into the environment, and with only 17% of disposable vapes being recycled, it is evident how vapes affect society as a whole (King, 2023). This is no surprise to economists since negative externalities depend on the existence of public goods - a good where your consumption doesn’t diminish another’s and that everyone has access to - in this case, the air that we breathe.

It’s easy to overlook the consequences of our vaping habits - it's a reality we currently face. Figure 1 demonstrates how economists depict this externality. The total cost society and individual firms face from producing one extra vape is the same (where marginal private cost equates to marginal social cost). However, consuming one extra vape awards consumers higher benefits than society (the marginal private benefit exceeds the marginal social benefit), demonstrating a failure for the market to meet societal needs (IMF, 2017). This means that current consumption is at point ‘A’, where only private benefits are considered. However, society would prefer to be at point ‘C’ where societal benefits are also considered. Without intervention, this destination is out of reach, leading to constant overconsumption due to people falling victim to nicotine addiction.

 Figure 1: a diagram showing the negative externality of consuming disposable vapes in a competitive market structure, depicting overconsumption and the societal optimum point. Source: original.

Is Government Intervention Necessary?

According to the Coase Theorem, the externality can be compensated to the “losers” (the rest of society) without government intervention if property rights are well defined between disposable vape users and non-users. Here is where the problem lies: it is difficult to assign property rights amongst the air we breathe, and it would be impossible to bargain between an innumerable amount of people. Since private solutions fail to address externalities, it is clear why government intervention is needed.

Whilst acknowledging the necessity of government intervention, you may think a ban is excessive. One alternative is for the government to impose a tax on firms, spilling over to consumers as a price increase, in hopes that the usage of vapes will fall.

Yet, economists assume people make logical decisions, which may not hold true for those dealing with addiction. Due to their addictive nature, consumers may be less responsive to a price increase. To make things worse, the government has difficulties measuring the monetary value of externalities, which makes it challenging to implement.

An alternative is informing the public of vaping risks, presumably leading to reduced production and usage. However, as economists assume that firms maximise profits, they are unlikely to dwindle production in light of this information. Ideally, consumers should care about their health enough to respond to these risks. Yet economists affirm that people tend to prioritise present satisfaction over future consequences.

It can be easy to see why the government would introduce such drastic measures by proposing a ban on the sale of them altogether.

Is Government Intervention Effective?

So, as we have discovered, vaping’s negative externality and the irrationality fueled by addiction both seemingly justify government intervention. But is the benefit of a ban really that black-and-white?

One consequence of a ban on disposable vapes is the emergence of black markets, where scarce or illegal goods are traded. As black markets are unregulated, these products are sold without quality assurance, potentially posing worse health risks than before. Counterfeit vapes that were confiscated from a UK school contained dangerously high levels of lead, amongst other toxic chemicals (Watkinson, 2023). It gets worse: black markets, driven by organised crime, often target lower-income communities, escalating economic vulnerabilities and heightening the impact of crime. Policymakers face the daunting task of maintaining a balance between addressing immediate public health concerns and minimising long-term risks.



Another consequence we will see emerge from a ban on vapes is both job losses and profit reductions in a growing industry that could contribute to steady economic growth. In 2021, the vape market reached £1.325 billion, showing a 25% surge over the preceding four years (Griffin, 2022). Not only would this mean thousands of households out of jobs, but it would also reduce tax revenue for the government, increasing the trade-off of the ban.

Considering the complexities surrounding the issue of vaping: balancing public health concerns, market freedoms, and the risk of black-market consequences—what stance do you take in banning disposable vapes?

Bibliography:

(No date a) Use of e-cigarettes (vapes) among young people in great ... Available at: https://ash.org.uk/uploads/Use-of-vapes-among-young-people-GB-2023-v2.pdf?v=1697209531 (Accessed: 17 April 2024).

(No date b) British American Tobacco - Home. Available at: https://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DO9WRJYH (Accessed: 10 April 2024).

Griffin, P. (2022) First ever report into Vaping’s impact on UK economy reveals flourishing multi billion pound industry, UKVIA. Available at: https://www.ukvia.co.uk/first-ever-report-into-vapings-impact-on-uk-economy-reveals-flourishing-multi-billion-pound-industry/#:~:text=As%20a%20whole%20turnover%20within,doubles%20to%20%C2%A32.8bn. (Accessed: 10 April 2024).

King, B. (2023) Five million vapes thrown away every week - research, BBC News. Available at: https://www.bbc.co.uk/news/business-66740556 (Accessed: 10 April 2024).

Mediaofficer (2024) Disposable Vape Ban and what it means for young people, The Education Hub. Available at: https://educationhub.blog.gov.uk/2024/01/29/disposable-vape-ban-and-what-it-means-for-young-people/ (Accessed: 10 April 2024).

Reimer, D. and Houmanfar, R.A. (2017) ‘Internalities and their applicability for organizational practices’, Journal of Organizational Behavior Management, 37(1), pp. 5–31. doi:10.1080/01608061.2016.1257969.

Thomas Helbling is an Advisor in the IMF’s Research Department. (2017) Externalities: Prices do not capture all costs, IMF. Available at: https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Externalities (Accessed: 12 April 2024).

Vaping to Quit Smoking (no date) NHS choices. Available at: https://www.nhs.uk/better-health/quit-smoking/vaping-to-quit-smoking/#:~:text=Nicotine%20vaping%20is%20substantially%20less,quitting%20smoking%20and%20staying%20quit. (Accessed: 29 March 2024).

Watkinson, H.P. and L. (2023) Vaping: High lead and nickel found in illegal vapes, BBC News. Available at: https://www.bbc.co.uk/news/health-65614078 (Accessed: 3 April 2024).

What does vaping do to your lungs? (2021) Johns Hopkins Medicine. Available at: https://www.hopkinsmedicine.org/health/wellness-and-prevention/what-does-vaping-do-to-your-lungs (Accessed: 16 April 2024).

What are the hidden Economic costs of Smoking?

When thinking about the costs of smoking, it’s fairly reasonable to suggest that almost everyone knows the answer; it has undoubtedly been asked and answered several times! Even so, Economists believe that economics is at the underpinnings of everyday life, and so can explain why people make the decisions that they do, or why and how certain outcomes arise (Levitt and Dubner, 2006).  Thus, Economists would turn to answer this question by delving not only into the direct but also indirect costs associated with smoking, which may be imposed and “hidden” from society at large.

The indirect cost we focus on surround externalities; a cost or a benefit imposed upon someone by the actions of others.

Let’s first turn to the above diagram, which illustrates the market failure of a negative consumption externality associated with smoking. We can see that the MPB is greater than the MSB, resulting in a Pareto-inefficient allocation (simply put, one individual is being made better off whilst making the other worse off). This leads to the overconsumption of cigarettes, creating an external cost which reduces the well-being of others indirectly affected.

The Private and Societal costs of Smoking 

Does buying cigarettes cost more than its upfront price? 

Yes, one suffers in terms of financial costs and a loss in productivity. These so-called private costs are hidden, because at face value they aren’t typically accounted for by individuals who smoke. Usually, smokers just account for the private cost of a packet of cigarettes. Diving deeper, the habit really strains the pocket. It consumes funds that could otherwise be spent upon necessities. Financially for low income households, this can have detrimental effects. Mainly due to the inelastic addictive nature of the product, meaning no matter any change in price demand will remain generally unaffected. 

What about other hidden private costs?

• Unsurprisingly, as more unhealthy smokers start buying insurance to protect themselves, the premiums rise to reflect the increase in risk. Imposing a negative spillover effect onto non smokers facing the increase in premiums, for which they aren’t compensated.
• Implicitly, smoking hinders employment prospects as a response to deteriorating productivity (Lee, 1991). An unforeseen cost that has big potential to cause discrimination in hiring or promotions, limiting career potential.

Is there an impact on Society?

Smoking is a cause of multiple illnesses. It not only increases the need for medical and social care services for the smoker but for those exposed to second hand smoking.

What does this mean in terms of the public provision of healthcare?

Well, the additional expenditure puts pressure on the health system, diverting resources from other financial and health matters. Which imposes a hidden cost on society, since smokers don’t factor in the magnified effects of smoking faced by the NHS.

What do these social costs look like?

• By 2023 it has measurably created an additional £3 billion annually to the provision of NHS and social care, with people who smoke requiring social care on average 10 years earlier than non-smokers (Department of Health and Social Care, 2023).
• Further, smoking creates higher demand for emergency services and increases the need for prolonged hospital stays. Hence reducing the capacity of medical services and worsening the backlog (Hopkinson, 2022).

Unfortunately, most individuals aren’t aware of how these hidden factors span across the whole of society.

Solutions to Smoking

So, what exactly can be done to get smokers to fully reflect the external effects of their actions, lessening the impact of this hidden economic cost on society, or at the very least make them aware of the repercussions this consumption has on themselves in the future?

Economists coin the term “internalising the externality”, first proposed by Nobel prize winner Ronald Coase. This is where producers of an externality (smokers in this case) bear the full external costs (or benefits) of their actions, mitigating the effects of any unwanted exposure of smoking on non-smokers.

Coase proposed this approach under the assignment of property rights, which essentially allows an individual or party to determine how things are used. However, given the context of smoking, these are extremely difficult to assign considering the many individuals who are affected by cigarette consumption and the externalities that result thereof; Coase’ condition involving property rights is more suitable to situations involving smaller groups of individuals (Parkin et al., 2008).

But thankfully, government intervention through the likes of regulation can protect public health by attempting to make the smoker consider and “internalise” the external costs imposed on themselves and on others, inducing efficiency!

What forms of regulation are in place for these hidden costs?

Well, the government currently has a tax on cigarettes set at the hefty rate of 16.5% RRP plus an additional £6.33 on a pack of 20 (HM Revenue and Customs, 2024). This means consumers spend a larger proportion of their income on tobacco products. Upon realising that, you’d expect smokers to be deterred from buying as many. However, we all know tobacco’s an addictive product, with an inelastic demand as signalled earlier. So, while not necessarily working as a deterrent to smoking habits, the tax does successfully achieve revenue for the government, like the £10 billion in 2022, that can be spent on additional preventative measures or funding the extra healthcare that smokers require (Indirect Tax Receipts Monitoring team, 2024).

However, it’s possible that a Pigouvian tax could be used instead, where its value would be set equal to the calculated social cost of smoking, aligning the MPC curve with the MSC curve in the diagram above, eliminating all external costs (Bowles et al., 2017).

The UK itself has implemented others schemes to reduce smoking and its hidden costs, like the mandated dark packaging with specific health-warning images. This is known as a behavioural nudge policy because it subconsciously influences decision-making without impacting consumers freedom of choice. An effective attempt to discourage smoking and make people reconsider the addictive habit since they’re reminded that ‘smoking kills’ every time they buy a new pack.

Reference list

Bowles, S., Carlin, W. and Stevens, M. (2017). Market successes and failures: The societal effects of private decisions. The Economy. [Online]. Available at: https://www.core-econ.org. (Accessed: 14 April 2024).

Department of Health and Social care (2021). Tobacco packaging guidance: Guidance for retailers, manufacturers and distributors of tobacco products, enforcement agencies and the public on tobacco packaging in Great Britain. Available at: https://assets.publishing.service.gov.uk/media/6079a6a88fa8f57356118bb2/tobacco-packaging guidance-great-britain-april-2021.pdf (Accessed: 14 April 2024).

Department of Health and Social care (2023). Stopping the start: Our New Plan to Create a Smoke free Generation. Available at: https://www.gov.uk/government/ publications/stopping-the-start-our-new-plan-to-create-a-smokefree-generation/stopping-the-start-our-new-plan-to-create-a-smokefree-generation (Accessed: 14 April 2024).

HM Revenue and Customs (2024). Tax on Shopping and Services: Alcohol and Tobacco duties. Available at: https://www.gov.uk/tax-on-shopping/alcohol-tobacco (Accessed: 14 April 2024).

Hopkinson, N. (2022). ‘The health and social care crisis makes tobacco control an imperative’. BMJ ,(379), pp.1-2. [Online]. Available at: https://www.bmj.com/c ontent/bmj/379/bmj.o2491.full.pdf (Accessed: 14 April 2024).

Indirect Tax Receipts Monitoring team (2024). Tobacco statistics commentary January 2024. Available at: https://www.gov.uk/government/statistics/tobacco-bulletin/tobacco-statistics-commentary-april-2023--2#:~:text=2023%2D% 2D2-,1.,than%20the%20previous%20financial%20year (Accessed: 14 April 2024).

Lee, D.R (1991). ‘Government v. Coase: The Case of Smoking’, Cato Institute, pp.151-164. [Online]. Available at: https://www.cato.org/sites/cato.org/files/serials/files/catojournal/1991/5/cj11n111.pdf#:~:text=It%20was%20Coase%20who%20pointed,who%20are%20engaged%20in%20it. (Accessed: 14 April 2024).

Levitt, S.D. and Dubner, S.J. (2006). Freakonomics. New York, NY: Harper Trophy.

Parkin, M., Powell, M. and Matthews, K. (2008). Economics. 7th edn. Harlow: Addison-Wesley Publishing.

Your Daily Brew: The Tale of Your Daily Cup

Hey there, coffee aficionado! Are you one of the many university students who kick-start their day with a steaming cup of joe? Well, if you are, you’re not alone. You wake up to the enticing aroma of freshly brewed coffee wafting through your dorm. It’s a ritual, a daily necessity that starts your day and keeps you going through those early-morning lectures and late-night study sessions.

Every morning, you stand in line at your go-to cafe, eagerly anticipating that caffeine fix. Little do you know, there’s more than meets the eye in your Java journey! A world of economic intricacies swirling around that comforting cup that shapes your morning routine. As you sip your steaming latte, you unwittingly participate in a global economic dance fraught with externalities, social welfare dilemmas, and public good conundrums.

While you’re enjoying your brew, imperceptible costs known as externalities cast a shadow over your steaming cup of joe. Externalities are like the unintended ripples caused by tossing a pebble into a pond. In economic terms, these are the fortuitous consequences of economic activities that affect parties who aren’t directly involved in the transaction. While you enjoy your latte, ever thought about the environmental toll of coffee production?

The cultivation of coffee beans requires lands with rich biodiversity, such as tropical rainforests. But, with the increasing world demand for coffee, the expansion of coffee plantations has led to deforestation, habitat destruction and loss of biodiversity. Not to mention the use of pesticides and fertilisers which can pollute water sources and harm local ecosystems. With global coffee production now increasing to 168.2 million bags in the year 2022/23, these externalities are now amplifying in significance and size.

Yet, it’s not just the environment that bears the burden. Spare a thought for the coffee farmers behind your morning brew. Many of them work under challenging conditions, facing low wages, precarious working conditions, and fluctuating market prices. In fact, according to Fairtrade, smallholder farmers produce 60% of the world’s coffee yet nearly half are struggling to meet their ends causing them to grapple with the perpetuating cycle of poverty. These are the significant social costs associated with coffee production, yet they are often obscured from view as you enjoy your morning pick-me-up, casting a shadow over the industry’s conscience and are the hidden price tags attached to your daily caffeine fix. Does the satisfaction you derive from your morning ritual outweigh the broader societal costs of coffee production?

Negative externalities, such as social inequality and environmental deterioration, can weaken social welfare if not addressed, as seen in Figure 1. This occurs when the marginal social cost (MSC) exceeds the marginal private cost (MPC), implying that the use of agricultural chemicals provides private benefits to those who choose to use them while harming the environment. This leads to inefficiencies, including Pareto inefficiency which is an economic phrase that refers to allocating large amounts of finite resources to an activity that results in a negative externality.

This basically means there is room for improvement for all parties! In the example of coffee production, the pursuit of profit, divorced from social and environmental considerations exacts a toll on the common good by perpetuating a cycle of exploitation and environmental degradation.

Figure 1

So, where does your coffee fit into all of this? Well, think of it as a public good. Public goods are like the air we breathe – available to everyone and do not diminish its availability by one person’s consumption. A classic example of a public good is national defence, which the UK government spends a hefty £54.2b on in 2023/24 4 . Regardless of whether you contributed to its provision through taxes or not, you will nonetheless benefit from what it offers.

But how does your morning coffee relate to public goods? Well, consider the role of infrastructure in the coffee industry. From roads and ports for transportation to research and development for crop improvement, various forms of infrastructure support coffee production and distribution. However, the provision of public goods poses challenges, notably the free-rider problem, as individuals seek to benefit without contributing by not investing in sustainable practices, supporting fair-trade initiatives, or neglecting the welfare of coffee farmers.

So, what can you do to navigate these economic waters and steer towards a more equitable future for coffee? As a consumer, the most you can do is to promote transparency and fair-trade practices. You can demand sustainable coffee and support an equitable supply chain. However, bridging the gap between awareness and action remains a formidable task, underscoring the need for targeted marketing and market signalling strategies. There is a need to create a market environment that supports sustainable consumption such as advertising eco-friendly products that foster a positive change.

Moreover, utilising economics may hold the key to internalising externalities and incentivising sustainable practices. For example, Pigouvian taxes (tax per unit of pollution generated) can be used to reduce harmful output. Another solution is related to Coasian bargaining, which is the idea that if parties can negotiate to correct a negative externality essentially free of cost, then the externality can be internalised. In short, one party can ‘ bribe’ the other to stop a harmful action.

For example, you may offer to buy headphones for your house mate who plays their music very loud on their speaker every night! Yet, challenges are abound, from implementation hurdles and expensive transaction costs to power imbalances within the supply chain and ambiguity over property rights (AKA who is at fault and who is affected?).

So, as you enjoy that next cup, keep in mind the impact of your choices. Opt for fair-trade beans—they're your way of saying that social and environmental responsibility isn't negotiable.

You're delving into more than just a simple caffeine boost. It's a glimpse into the intricate world of economics. By grasping the hidden expenses and wider implications of coffee production, you can push for a fairer and more sustainable industry.

References

1. Coste, R. and Myhrvold, N. (2024). Coffee production , Encyclopedia Britannica . Encyclopædia Britannica, inc. [Online]. Available at: https://www.britannica.com/topic/coffee-production (Accessed: 18 April 2024).

2. International Coffee Organization. (2023). COFFEE REPORT AND OUTLOOK . https://icocoffee.org/documents/cy2023-24/Coffee_Report_and_Outlook_December_2023_ICO.pdf

3. Ministry of Defence. (2024). UK Defence in Numbers 2023. https://assets.publishing.service.gov.uk/media/660d4b5197e60600112b2218/MOD_Defence_in_Numbers_2023.pdf

4. Realistic and fair prices for coffee farmers are a non-negotiable for the future of Coffee . (2023). Fairtrade International . [Online]. Available at: https://www.fairtrade.net/news/realistic-and-fair-prices-for-coffee-farmers-are-a-nonnegotiable-for-the-future-of-coffee (Accessed: 18 April 2024).

5. Takahashi, R. (2021). Who is attracted to purchase green products through information provision: A nationwide social experiment to promote eco-friendly coffee. Environmental Science and Policy , 124 , 593–603. https://doi.org/10.1016/j.envsci.2021.08.006

Beyond the Pavement: The Hidden Costs and Benefits of Urban Road Construction

 In a highly developed city, it is usually densely populated, with rapid economic growth and concentrated traffic pressure. When the existing number of lanes no longer meets people’s traffic needs, the government’s obvious response is to add new roads to alleviate the pressure on existing lanes, but is it that simple? This requires us to analyse the advantages and disadvantages of doing so from an externality perspective.

In economics, roads are public goods because the consumption of roads is non-rivalrous and non-excludable. Non-excludability means that once the goods are produced, people cannot be excluded from using it. Non-rivalry means that your usage of the public goods doesn’t affect others’ usage of the public goods. Road construction can generate both positive and negative externalities. 

As roads are non-excludable, the positive externality created by new roads is typically under-provided, as people tend to free-ride on the road without contributing to its cost. Therefore, the road provision is below the optimal level, which is pareto-inefficient. On the other hand, goods with negative externality are typically over-provided. This is mainly due to construction people not internalising the cost associated with building roads into their pricing(Weitzman, 2015). If they don’t need to pay for the cost of the noise during construction, then the road construction is above the socially optimal level, which is also pareto-inefficient. Overall, due to under-provision of positive externalities and over-provision of negative externalities associated with the road construction, the provision of road construction is pareto-inefficient. To solve the negative externality problem, governments can levy Pigouvian taxes on the noise pollution during road construction. This allows the government to internalise the negative externalities into economic calculation of those responsible for it (Weitzman, 2015). 

Positive Externalities

One positive externality from building new roads is the appreciation of property values in surrounding areas. This appreciation arises as improved connectivity raises demand for the properties in that location, as roads improve accessibility, reducing travel time to key amenities like schools, workplaces, and shopping centres. In addition to providing homeowners with more equity, rising property values should lead to an increase in government revenue through higher property tax. This additional revenue could be used to make further improvements within the area, such as improving schools or hospitals, causing a multiplier effect, with the creation of new jobs in the location. Constructing new roadways can greatly improve traffic efficiency, resulting in another positive externality that brings advantages to the wider society. Enhanced road infrastructure generally results in the alleviation of congestion on current routes, leading to decreased journey durations and a lower occurrence of traffic congestion. In addition, a more streamlined traffic flow leads to a decrease in vehicle emissions, improving air quality and reducing greenhouse gas emissions.

Negative Externalities

The construction of roads generate negative externalities with spillover effects. The ecological damage from road construction is not only damaging to the environment but also the local communities. Emission of harmful pollutants in construction exacerbates air pollution which leads to respiratory diseases amongst the local community, or soil erosion of the environment. This affects the local air quality and public health, particularly in marginalised communities, worsening existing socioeconomic disparities. These negative externalities stem from the lack of property rights on environmental resources and mechanisms to internalise these costs. Consequently, there will be suboptimal resource allocation in construction, resulting in pareto-inefficiency. Despite benefitting the road users and constructors, the external costs to society outweighs as they suffer more. In this scenario of pareto-inefficiency, building new roads fails to make someone better off without making someone else worse off. 

Induced Demand and Traffic Congestion

Furthermore, the belief that building new roads will automatically alleviate traffic is misguided. Instead, it can lead to induced traffic demand as it will attract an influx of new drivers seeking shortcuts (Mann, 2014). Safety concerns arise from the increased risks of accidents and road fatalities for both commuters and pedestrians (Anciaes, Metcalfe & Heywood, 2017). The costs linked to this, such as property damages and emergency response services, impose externalities on the wider society.

Coase Theorem In Action

Another approach to solve the externality problem is to use the Coase theorem, which suggests that externalities can be solved through negotiation, if the property rights are clearly defined and transaction costs are low enough (Madema, 2014). In road construction case, if the government can clearly define who owns the property rights, i.e Whether the road construction team has the right to pollute the air or is the residents around have the right to enjoy the clean air, then the negative externalities can be solved through the negotiation between the road construction team and the local residents. However, the Coase method is not always effective due to the high transaction cost during the negotiation and being a lengthy process.

Tragedy of Commons

The case of “tragedy of commons” is also not negligible. The reason for the so-called "tragedy" is that after the road is built, the other existing roads will no longer be as effective in terms of transportation, because although the construction of this new road provides utility, some of its utility is taken from other roads. For example, there was originally only one road to reach a place, and the other direction was barren. Now, a new road has been built on barren land, and people can choose either of the two roads. For the barren land, building a new road is definitely an improvement, but since people are scattered into two roads, fewer people are travelling on the original road. 

Conclusion

In summary, although the original intention of building roads is good, the process and results of road construction may lead to negative externalities. Once negative externalities exceed positive externalities, building new roads becomes unnecessary. Therefore, before constructing roads, it is important to consider external influences from multiple aspects, including government and individual levels, in order to optimise in as many aspects as possible and truly improve people's livelihoods. 

References

Anciaes, P. R., Metcalfe, P. J. and Heywood, C. (2017). “Social impacts of road traffic: perceptions and priorities of local residents”. Impact Assessment and Project Appraisal, 35(2), 172-183. Available at: https://www.tandfonline.com/doi/full/10.1080/14615517.2016.1269464 

 

Mann, A. (2014). “What’s up with that: Building Bigger Roads Actually Makes Traffic Worse”. Wired. Available at: https://www.wired.com/2014/06/wuwt-traffic-induced-demand/

 

Surendra, P. (2023). “Building More Roads Just Creates More Traffic. Here’s The Proof.”. Greenpeace UK. Available at: https://www.greenpeace.org.uk/news/building-new-roads-just-creates-more-traffic-heres-the-proof/

Weitzman, Martin L. (2015). “Internalising the Climate Externality: Can a Uniform Price Commit Help?” Economics of Energy & Environmental Policy. , 4(2), 37–50. Available at https://www.jstor.org/stable/26189379

Medema,S.G. (2014). “Economics and Institutions: Lessons from the Coase Theorem”. Revue Économique, 65(2), 243–261. Available at: https://www.jstor.org/stable/42771815

Social Costs and Benefits of Hosting Mega-Events: The Example of Paris Olympic Games

 

As we await the grandeur of the 2024 Paris Olympic games, we must consider the economic repercussions that accompany such a spectacular event. In this blog we will specifically be focusing on economic repercussions in the form of externalities, a cost or benefit of economic activity to an unrelated third party. With Paris joining London as the only city to host the Olympics three times (International Olympic Committee, 2022), they are no stranger to these, however it is important to note the role that France's current political-economic landscape plays when shaping the effects of such externalities.

• Positive Externalities

There are many positive externalities to the Games. An obvious one is the employment that comes with hosting the Olympics. They are expected to generate 250,000 jobs, many directly for Parisians themselves, boosting living standards (Sylvain, 2019). This reallocation of resources

 rom governments to citizens, will undoubtedly bring benefits. They will also affect France as a whole also, with it gaining a chance to gather new tourist opportunities. An expected 15 million tourists will arrive (Menocal Pareja, 2024). This could lead to a multiplier effect as France can advertise itself, and gain more tourists over coming years, who will be inspired by their first trip via the games.

Whilst it is obvious to discuss the new jobs created, other benefits to the city as a whole such as better transport infrastructure. The games will increase capacity on buses, metro and trains by an expected 15% (Muñana, 2024). 

An estimated 45,000 volunteers will aid the running of the Games (Paris 2024, 2024). Whilst unpaid, we can see how popular this opportunity is as nearly 300,000 have applied. This is a prime example of how ‘community spirit’ generated from the Olympics. Externally, the Games can benefit international relationships between governments. Whilst, the average person may not feel this directly, it is undeniable that living in a more stable world is favourable for everyone.

• Negative externalities

Security: A crucial question arises with the organisation of Paris Olympics: will the city be less safe during the event? Described by the French government as the "biggest security challenge France has ever had to organise" (Albertini, 2024), two main concerns arise. Firstly, Paris, already a target for terrorism, could become even more vulnerable during this high-profile event. Secondly, historical data suggests a potential rise in crime rates. A study on crime rates during the 2012 Olympics found a positive correlation between hosting the Olympics and crime in the host city (Le, 2018). Tourists, unfamiliar with the area, are easy targets for pickpocketing, theft, and burglary.

Environment: The organisation of large-scale events inevitably carries significant environmental repercussions. From the construction of new infrastructure to the rise of tourism, these activities contribute to heightened pollution. In light of the Coase theorem, this scenario highlights the inefficiency caused by negative externalities in the absence of well-defined property rights. The inability to achieve a Pareto equilibrium (i.e. the optimal level of pollution) stems from the lack of ownership over polluted air, because it is a public commodity. Thus, bargaining between the polluter and affected parties is impracticable. Consequently, the polluter faces no higher costs for exceeding the socially desirable level of pollution, leading to a situation where social costs, borne by the society, exceed private costs.

• The Tragedy of the Commons

Besides, another negative externality that might happen in Paris is the overcrowding in the public transportation system. There are concerns that with so many visitors over the summer, the already chaotic Paris metro may be unable to cope during the 2024 Olympic Games (Lloyd, 2023). This is closely related to the tragedy of the commons problem, in which, the overexploitation of common goods, which is rival but non-excludable, causes externalities. Each individual who decides to use public transportation contributes to the congestion and overcrowding. As a result, this reduces the comfort of public transportation. Graph 1 illustrates this topic. All individuals seek to maximise their utility when using public transportation. Their utility function is 𝑓(𝑐), and their relative cost is €𝑝𝐶 per unit, so the utility maximising function is equal to 𝑓 𝑐 − 𝑝𝑐𝐶. The maximising point is where marginal utility equals marginal cost (point 𝐴). However, since this is a non-excludable common goods, the entry of people into public transportation continues until the economic profit is equal to zero. The increased consumption from points 𝑐∗ to 𝑐̂ demonstrates this overcrowding issue.

• Internalising the externalities

Economists talk about "internalising externalities" when the full cost (or benefit) of an action falls on the party responsible for it. The organising committee and the French government aim to do this to mitigate the games' adverse effects on society. However, considering the negative externalities of criminality and pollution, fully eliminating risk of crime or achieving zero emissions seems overly ambitious. Although, reducing these negative externalities is certainly achievable. In addressing the heightened risk of crime, the government intends to increase spending on security, thereby partially internalising the externality (Albertini, 2024). Increased security measures will prevent criminality and shift part of the social cost (less security) to the organisers (the producer of the externality). Similarly, the organising committee is tackling the environmental externality by aiming to halve the Games' carbon footprint by taking measures such as prioritising temporary or existing structures (Olympics, 2024).

Summarising

Despite the wide array of positive impacts the 2024 games will bring to Paris, many are only short term benefits which have the potential to turn into long-term liabilities. One example of this is the immense tourism which boasts a large injection of cash into the Paris economy, which can quickly turn into a major pollution problem. However, as with most negative externalities, this is dependent on the ability of the French government to manage such issues. Finally we must note that we are also responsible for preventing negative externalities, so for anyone visiting Paris for the 2024 Olympics: make sure to

recycle!

Reference List

Albertini, A. (2024), Terrorism remains the key challenge at the Paris 2024 Games, Le Monde. Available at: https://www.lemonde.fr/en/france/article/2024/03/06/terrorism-remains-the-keychallenge-at-the-paris-2024-games_6589983_7.html (Accessed: 2 April 2024)

International Olympic Committee (2022). Check the 24 things you do not know about Paris 2024. [online] Olympics.com. Available at: https://olympics.com/en/news/24-things-we-already-knowabout- the-olympic-games-paris-2024. (Accessed: 11 April 2024)

Halving the carbon footprint of the games, olympics.com. Available at: https://olympics.com/en/paris-2024/our-commitments/the-environment/carbon-neutral-games (Accessed: 13 April 2024)

Le, N. (2018), Evaluating Crime as a Negative Externality of Hosting Mega-Events: Econometric Analysis of the 2012 London Summer Olympics, WVU. Available at: https://researchrepository.wvu.edu/cgi/viewcontent.cgi?article=1009&context=econ_workingpapers (Accessed: 2 April 2024)

Lloyd, O. (2023). Chaos in Paris metro leads to further concerns for 2024 Olympics and Paralympics. [online] www.insidethegames.biz. Available at: https://www.insidethegames.biz/articles/1137992/paris metro-2024-olympics (Accessed 13 Mar. 2024).

Menocal Pareja, M. (2024). Paris 2024 facts and figures six months out. [online] www.insidethegames.biz. Available at: https://www.insidethegames.biz/articles/1143455/numbers-paris-2024-nine-budgetspectator#:~:text=The%20main%20protagonists%20will%20be (Accessed 1 Apr. 2024).

Muñana, G. (2023). Paris 2024 promises public transport to all venues. [online] www.insidethegames.biz. Available at: https://www.insidethegames.biz/articles/1143062/paris-2024-promises-public-transport (Accessed 1 Apr. 2024).

Paris 2024 volunteer programme (2024) Paris 2024. Available at: https://www.paris2024.org/en/volunteers/ (Accessed: 01 April 2024).

Sylvain, G. (2019) Economic impact study reveals that Paris 2024 could generate €10.7bn in economic benefits and create 250,000 jobs, Paris 2024. Available at: https://www.paris2024.org/en/economic-impact-study-reveals-paris-2024-could-generateeu107bn-economic-benefits-and-create/ (Accessed: 01 April 2024).