APPLIED ECONOMICS

Q86. Is advertising a good thing?

Many people see advertising as the worst product of consumer society. Economically speaking, however, advertising increases market demand for a product by persuading consumers of its advantages over other products. Consumers buy the advertised product in increased volumes, increasing demand. Because of larger market demand, the business producing this product may begin to enjoy economies of scale, which would result in more market output, lower prices, and benefits to consumers.

Rather than stimulating competition, however, heavy (and expensive) advertising of existing brands might make consumers less likely to try new brands, thus raising the cost of entry for newcomers. Thus advertising's role in economic activity is still the subject of much debate.

Q87. How would economists deal with pollution?

An externality is the positive or negative impact that individual decisions have on others besides those specifically involved in the transaction. The best example of a negative externality is pollution. The person who pollutes does not bear the cost of polluting, nor does the person who buys the polluting products. However, those around the polluters - who live near the factories perhaps - bear the cost.

In the presence of externalities, markets tend to fail, meaning they do not price the pollution properly. The private cost to the polluter is not the same as the social cost of polluting activity to society. A tax or subsidy policy normally is applied by economists to bring the marginal cost of pollution - the cost of producing one extra polluting unit - to coincide with the marginal social cost of that pollution.

Similarly, when driving on roads, the problem of congestion happens because an individual car owner does not worry about the effect their driving has on others - they just want to get from A to B. Introducing tolls and congestion charges forces the individual to face the social cost of driving, especially during peak hours, and is an economic solution to the problem of congestion.

Externalities can be positive as well. Infectious disease control, where one sick individual is isolated and treated, thus stopping others from becoming sick, is one example. Another example is art. The artist creates a work of art that is bought, and enjoyed, by one person. If the art is good enough, and survives, the art may be moved into a museum, where many can enjoy it.

Q88. What is a demographic transition and will it affect my pension, or hurt my children's chances in life?

As economies develop, the characteristics of their population change as well.

Before industrialisation, birth and death rates are quite high, so the population does not change overly. Countries that industrialise tend to have relatively well-developed medical infrastructures, as well as basic hygiene, safer work and living environments, and nutrition. Their birth rate begins to climb, and their death rate begins to fall. Suddenly a much larger, healthier, population is available for work, increasing income per person in the economy. If income per person is larger than the population growth rate, the economy gets richer and richer. Then, urbanisation, education and labour market opportunities for women begin to reduce birth rates. Small families become the norm. The death rate stays very low, as people stay healthier for longer and live longer. So the population begins to shrink, as fewer children are born per woman to replace those dying. In addition, older people create an economic burden on younger workers, as fewer and fewer workers are available. Following this, a rebound in fertility takes place, as advanced economies are experiencing now. Society replaces itself at a lower rate, following the demographic transition.

Demographic transitions tend to harm the younger members of society, as increased numbers of the elderly in the population must be paid for by younger workers. The more older people there are in a society, the more costly state pensions will be, and the more young workers in an economy, the more intense competition will be over jobs, depressing the wage rates younger workers will see.

 
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