Supply side: change in production costs (e.g. costs of raw materials) , change in producer productivity, less or more efficient technology, change in climatic conditions, change in number of producers, sellers or firms, change in producer preference and expectations, obstacles or inducements to production, change in laws relating to use of bicycles or cares, change in taxes imposed on bicycle importers.
Demand side: change in disposable income, change in trends and fashions, price of substitutes or complementary goods, future availability, change in taxes, change in population.
Some types of goods and services are seen as socially desirable or merit goods and are so important that everybody should be able to use them, even if they are poor and cannot afford to pay for them. These basic goods and services include transport, education, health, energy, housing and communications. However, these goods and services are costly to run and therefore cannot be sold cheaply at a low affordable price otherwise the firms making these goods and services would not make a good profit. The government has therefore been forced to take on the main responsibility for providing public goods and services such as free education, low cost housing and affordable healthcare.
Another related failure of the market in the provision of goods and services is the free rider problem, which occurs as some goods and services are non-excludable, such as; national defence, prisons, lighthouse services, street lighting, fire brigades and other emergency services. This problem occurs in those instances where it is difficult to exclude members of the community who benefit from a service, but who choose not to pay. The free rider problem means that without government intervention many socially desirable public services would be under-produced.
• Using the annual budget to pay for public services
• Using the budget to pay for subsidies for consumers and producers
• Changing government laws and legislation
These are the costs or benefits associated with the production or consumption of goods and services that are passed onto third parties or spill over to affect others. Externalities result in the production of social costs or social benefits faced by society more generally.
Externalities in production:
These are externalities that flow purely from the production of a good or service. A factory producing steel that allows its waste to flow down an adjacent river is an example of a negative externality. When taking its costs of production into account, it does not incorporate costs of polluting the river, sometimes referred to as social costs that are borne by the users of the river. In contrast, a business that invests in research and development (R&D) or training of its employees is seeking to derive benefits (i.e. profit) from their production. However, these activities will tend to confer benefits to third parties or society more generally, such as when trained employees move to a new employer or when the R&D leads to new technological inventions or advances, which improves the welfare of society in general.
Externalities on consumption:
These are externalities that flow purely from the consumption of a good or service. Whilst some externalities in consumption can be positive (such as education and gardening), most are negative. Examples include the external costs associated with the consumption of illicit drugs, alcohol, cigarettes, and some firearms. In a free a market, consumption of these goods and services (also referred to as de-merit goods) would be far greater than occurs currently.
• Government laws or legislation
• Using an indirect tax
• Using government cash subsidies
• Education and advertising to inform the public