UK Edition
What fireworks teach us about economics – and why we need more of them
It is the best free fun of the month: turn off the lights, pull open the curtains and watch your neighbours’ fireworks glitter over the rooftops.
You get to stay in the warm, don’t have to tidy up the frazzled garden, and – best of all – you don’t have to pay a penny for the privilege. Thank you, Guy Fawkes.
But the free nature of this semi-illicit fun shines a sparkler on an important problem in economics: fireworks are "public goods".
This means that the person who pays for the rockets only gets part of the fun. Their neighbours can get almost as much delight by poking their nose over the garden fence and becoming a free rider at the buyer’s expense.
It is difficult to exclude other people from seeing the sparks and hearing the bangs, unless you happen to have an unusually private garden or stick to low-level fireworks only.
Typically public goods are under-provided as a result. The buyer bears the full price when the enjoyment is spread over plenty of free riders. If they contributed cash to match their enjoyment, more fireworks would be sold and everyone would have a better time.
The textbook economic solution to this is for the Government to get involved. Everyone is made to pay through their taxes, and more public good is provided, taking output to something closer to the level that balances enjoyment and payment.
This happens with other goods such as street lighting, or policing. Fireworks are a rather more domestic case, but local authorities often do put on a show.
If it is held in a venue that is closed off – a park surrounded by tall trees, for instance – the council can charge £5 or £10 to cover the costs and make sure the benefits are focused on those who have paid. Indeed, this could be done by a private company or civil society group too, as free riders are excluded.
If only a wide open space is available, it makes more sense to hold the event free of charge, as anyone could simply stand outside and enjoy the fun without a ticket.
Holding big public events can multiply the benefits. They generate more of an atmosphere than sitting alone peering out at your neighbour’s party. Space can be rented to food stands so visitors stock up on candyfloss or mulled wine.
And it becomes worthwhile spending money on the really top-end fireworks and musically timed displays, rather than the slightly shoddy Catherine wheels that get stuck after a few seconds and end up charring the fence.
On the other hand, fireworks also impose costs on other people, whether held at a public show or at home.
Dogs, cats and horses might be upset by the noise – Sainsbury’s recently announced it had stopped selling fireworks, citing animal welfare concerns.
Neighbours might not welcome the racket, but have little way to avoid an amateur display next door.
Burns are a regular hazard, occasionally from innocent accidents but more often from reckless teenagers gunning each other down with Harry Potter-style explosions.
And big displays lead to extra congestion.
Usually economists favour a tax on these "negative externalities" so that the user of antisocial goods pays the price.
For fireworks, that leads to a difficult equation, with competing arguments for and against their public utility and the role of the state.
This free-rider favours more shows – we can ignore the fun-sponges for a few days each year.