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In a recent BBC article, Government Ministers have introduced £40 million subsidy which will be invested in producers that create apprenticeship places over the next two years.  Having seen a “substantial decline” in apprenticeships over the past several years, the government investment hopes to overcome the cost of recruiting apprenticeships in small businesses with a one of payment of $500.  Employers offering full-time apprenticeships for 16 to 24-year-olds through the young recruits programme will get a 52-week wage subsidy of £3,900.

This strategy, whereby investing in producers in order to reduce unemployment and increase employee skill set  can otherwise be observed in the circular flow of income.  It can be comparatively described with the following diagram:

Before assessing the strategy the government has undertaken, an explanation of the circular flow of income is required. The basis for the circular flow of income follows a standard two-sector model by which the first circular flow is of the perspective of households and the second of producers. Households (1) provide labour, or assets, to a producers and (2) therefore receive an income – this is the standard and simplistic understanding of employment. Producers, on the alternate hand, (3) produce goods that are consumed and (4) use the revenue of selling the goods to produce more goods.

Thus, the Government has identified an obstruction in the circular flow of income; that “substantial decline” in the number of apprenticeships prevents a particular audience of consumers from contributing to the overall level of economic activity, thereby decreasing aggregate demand.  Therefore this government injection allows producers to reduce the cost of hiring and training an apprentice that would otherwise have been far more costly. By utilising the following diagram:

A recent BBC article has outlined a “sharp fall” in the number of children admitted to hospitals with severe asthma as a result of a smoke-free legislation that was introduced by the Government in July of 2007. The article indicated a “12% drop in the first year after the law [was enforced]” and that researchers from Imperial College London had been analysing NHS figures since April 2002 in order to make the claim.

Cigarettes are a form of demerit good that adversely affect third parties such as the children highlighted in the BBC article. Additionally, cigarettes produce both negative externalities of production and consumption. However, only the negative externalities of consuming cigarettes will be considered in this analysis.

The consumption of cigarettes diminishes social benefit, or utility, which therefore reduces the Marginal Social Benefit (MSB) compared to Marginal Private Benefit (MPB). On the graph above is a diagram which specifies the welfare loss created as a result of the private utility diminished by the negative utility suffered by the third party.  

As a result of the free market structure that cigarettes exist in, where MSC = MPB, the consumer will have maximised their private utility and ignore the negative externalities that occur with smoking, i.e. second hand smoke which has caused severe asthma amongst children. This means that the over consumption of the good will increase demand and subsequently price, Q1 and P1, respectively, and be higher than the socially desirable quantity demanded, Q* and P*, respectively. This additional area highlighted on the graph is the welfare loss to society.