1. Positive Externalities of Consumption Gym Membership

2. Market Failure PFM QFM PMC PMB CS PS TGT SMB1 This is the spill over benefits (e.g. increased expenditure on healthy nutrition options) that are gained by third parties e.g. nutrition shops or healthy food outlets. QS DWL It is a market failure because it is efficient to move from QFM to QS because the benefits (i.e. SMB1) exceed the costs (i.e. PMC) for all the units between QFM and QS. So the surpluses can be increased by the area of the DWL. At QFM with both consumer and producer surplus, total surpluses have been maximized. So is more allocatively efficient.

3. Policy One – Subsidy PMC PMC+Subsidy PMB SMB1 QFMQS PS PFM PS QPR PPR DWL Removed DWL Gym Membership

4. Efficiency and Equity Efficiency A subsidy on gym membership reduces the price for consumers from PFM to PS therefore increasing quantity consumed from QFM to QS. It increases the price received by producers to PPR from PFM therefore increasing quantity produced to QS. It is efficient to move from QFM to QS because the benefits (i.e. SMB1) exceed the costs (i.e. PMC) for all the units between QFM and QS. So the surpluses can be increased by the area of the DWL. Equity Equity will increase as a subsidy will encourage lower income earners to join the gym. This allows people to enjoy a service they previously could not afford and society benefits through increased expenditure on healthy nutrition options. Therefore this is vertically equitable as all levels of income can now afford this, (lower income people buying power increases) not just high income earners. A subsidy is not horizontally equitable because people who don’t use the gym but train elsewhere e.g. around a park or at home will not benefit from the subsidy unless they choose to join a gym.

5. Policy Two – Regulation QFMQS PFM PS SMB=PMB1 PMC PMB DWL Reduced DWL Gym Membership e e1

6. Efficiency and Equity Efficiency Making exercise compulsory is efficient because this regulation will increase the demand for gym memberships. This is because consumers have to obey the regulation, so some more wealthy consumers will choose to purchase a gym membership as they can exercise in any weather, so PMB shifts to the right to PMB1. This makes QFM move closer to QS removing the dead weight loss as the market now operates at e1. Equity Making exercise compulsory is horizontally equitable as it is fair for all types of people as consumers have the choice whether they want to join a gym or continue with their original exercise routine. This allows low income earners to avoid high costs of gym memberships but they are still following the rules by just going for a run around the street. This policy is not vertically equitable as the price has increased from PFM to PS therefore people with low incomes won’t be able to afford the memberships. Only those high income earners will be able to.

7. Most Appropriate Policy PMC PMC+Subsidy PMB SMB1 QFMQS PS PFM PS QPR PPR DWL Removed DWL Gym Membership

8. Best Solution The regulation policy is the most equitable and subsidy policy is the most efficient. The regulation may increase membership but not exercise as it will be hard for the government to police, whereas the subsidy will increase gym memberships and exercise. Considering this I believe the best solution is the subsidy because it is the most efficient as it offers the best possibility for consumers and producers. This is because we move closer to QS from QFM removing dead weight loss as of the decreased price paid by consumers and increased price received by producers. It is also fair to all types of income earners (vertically equitable). Subsidies are preferred over regulations as they let consumers decide how to internalise the spill over benefits i.e. least costs.