Commentary Draft #2

Not everyone earns benefits of entertainment festivals. The BBC news article reports the concerns of citizen living close to the upcoming “Beach Break Live”. The neighbors complain about the noise, litter and traffic they are set out to due to this event.

A negative externality consumption occurs anytime when an individual or a group, that plays no part in a market transaction is negatively affected by bearing some of the cost of this process. In the case of this music festival neighbors bear external costs created by the music festival. A third party is harmed by the consumption of this product which defines a negative externality of consumption."Nineteen hours out of 24 does not give you much peace.", a neighbor, who is worried about the extent that the loud music is being played at, complains.

Negative externalities are a common example of market failure caused by an over or under allocation of resources. Private utility is reduced by the negative utility suffered by a third party. The significance forthcoming problem can be analyzed in the following graph:

The market for music festivals

Due to the resulting pollution, traffic and noise of the music festival the benefit society obtains (marginal social benefit) is smaller than the benefit acquired by the producers of this music festival (marginal private benefit). This creates spillover costs which are externalized costs that the firm is not covering. The over allocation of resources towards this product is the difference of the quantity available (Qe) at Pe and the optimum quantity (Qo) at Po of this product. This creates a dead wealth loss, an area representing the total welfare loss society is bearing through this market transaction: The potential welfare gain if circumstances might change.

"The only way the event will be welcomed back is if we manage it properly.", the managers of the Cornwall music festivals announce. "We agree to (music) levels that are acceptable and the council can log in to the system and see what sounds are coming off the site.” That this government control will not limit the negative externalities created and therefore will not diminish the dead wear loss indicates that a better solution is required. A possible solution that would eliminate spillover costs would be giving compensations to people living close to “Beach Break Live”. This method would internalize spillover costs to the concert producer. Its affects can be examined from a graph:

The Market For “Music Festivals”

Due to the compensation the festival makers have to pay Marginal Private Cost is increased to a level at which it is at Qo and diminishes the dead wealth loss. The cost is now at a new price of P2.

That the cost of producers is now higher could lead to a rising festival price which due to the law of demand might decrease the number of visitors of “Cornwall Festival”. If more music festival managers were compelled by the governments to pay compensations to neighbors, they would think twice about the planning of a festival. This could lead to a decrease in supply of music festivals, which would resolve the over allocation completely. As a conclusion giving compensations to neighbors is a way of resolving market failure by resolving the over allocation of resources. By diminishing the welfare loss the utility of society is increased.