International Trade - Theory and Policy, 2010a

are neatly kept and homes are well maintained would generally raise the property values of all houses in
the neighborhood.
One could also argue that a healthy lifestyle has positive external effects on others by reducing societal
costs. A healthier person would reduce the likelihood of expensive medical treatment and lower the cost of
insurance premiums or the liability of the government in state-funded health care programs.
Negative Consumption Externalities
Negative production externalities occur when consumption has a detrimental effect in other markets in
the economy. Most examples of negative consumption externalities involve some type of dangerous
behavior.
Thus a mountain climber in a national park runs the risk of ending up in a precarious situation.
Sometimes climbers become stranded due to storms or avalanches. This usually leads to expensive rescue
efforts, the cost of which is generally borne by the government and hence the taxpayers.
A drunk driver places other drivers at increased risk. In the worst outcome, the drunk driver causes the
death of another. A smoker may also put others at risk if secondhand smoke causes negative health
effects. At the minimum, cigarette smoke surely bothers nonsmokers when smoking occurs in public
enclosed areas.
Public Goods
Public goods have two defining characteristics: nonrivalry and nonexcludability.Nonrivalry means that the
consumption or use of a good by one consumer does not diminish the usefulness of the good to
another. Nonexcludability means that once the good is provided, it is exceedingly costly to exclude
nonpaying customers from using it. The main problem posed by public goods is the difficulty of getting
people to pay for them in a free market.
The classic example of a public good is a lighthouse perched on a rocky shoreline. The lighthouse sends a
beacon of light outward for miles, warning every passing ship of the danger nearby. Since two ships
passing are equally warned of the risk, the lighthouse is nonrival. Since it would be impossible to provide
the lighthouse services only to those passing ships that paid for the service, the lighthouse is
nonexcludable.
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