I recently witnessed the effect an Apple store has on neighborhoods. After a store opened its doors in a slightly shabbier part of Brooklyn, the location appeared to transform into a revitalized clean street full of high-end cafes, shops, and a plethora of strolling people.
Thinking back to the externalities unit in my economics class, I wondered whether the Apple store had an externality of its own because it seemed to me like the two events – an Apple store opening, and the transformation of a location – were interconnected. Vaccines, Healthcare and Education are some of the textbook positive externalities we focused on as a class, but maybe Apple stores were causing a positive externality of their own. My thinking was as follows:
- Apple builds a sparkling new retail store in a less than an austere neighborhood.
- A more affluent crowd, which is the typical group of Apple customers, begins to pass through the street to use Apple Store.
- Other companies attempt to capitalize on this increased foot traffic by building high-end shops and cafes, especially seeing as the demographic consists of a large set of wealthy individuals; whole foods is just one example of a shop you will often see close to an Apple Store for example.
- The new stores attract a larger crowd and the street begins to revitalize.
- New stores engage new audiences, which in turn attract more stores and it becomes a self-fulfilling cycle.
In order to make this applicable to the economic theory of externalities, I assumed that an Apple Store is a product in itself, and the mere act of going to the Apple store is an act of consumption; therefore, the Apple Store has a positive consumption externality.
The Externality of an Apple Store:
In the case of Apple Stores, the positive externalities include the value of land surrounding the stores increasing, neighboring tenants rent increasing, larger amounts of foot traffic ensuing, and the area transforming into a cleaner, more upscale location. Consequently, the marginal societal benefit is higher than the marginal private benefit from shopping at Apple Stores, and on the diagram, the MSB curve is higher than the MPB curve. Invisible forces of the free market, however, will result in a quantity Qe of Apple Stores, which is less than the optimal quantity of Apple stores at Q*. This graph assumes that the demand for Apple Stores is infinite, and supply is the only thing that constrains the number of stores. MPB and MSB demand curves are horizontal as a result.
After conducting a bit of research, it became quite clear that Apple stores really do cause a positive consumption externality of their own. As it turns out, Apple retailers who you would imagine are charged a premium on property rent, are in fact given discounts on their rent. Cities would rather lose some rent revenue for a cheaper Apple Store because the positive externalities benefit society as a whole.
Subsidies are often the tool governments use when faced with a positive externality as they boost the demand for the good, and in this case, the rebate on rent which echoes the subsidy causes the supply side curve to shift right causing an increase in the supply of Apple Stores. With the new supply curve S + Subsidy, the quantity of Apple Stores is now at Q*, which is the optimal level for society.
Although the retail experience from an Apple Store doesn’t adhere perfectly to the economic model, the general theory pushes through and it seems that these outlets improve society and have a positive externality. I am also willing to bet that there are many stores like Apple’s that result in the same positive benefits to society, and it would be interesting to see how governments revitalize locations by pushing for specific shops.