Positive externalities

• What are positive externalities of production?

  • Positive externalities of production are often created during the production of a good/service
  • The externalities are caused by producer supply and result in a positive external impact on a third-party
  • The market is failing due to under-provision of these goods and services, as only the private benefits are considered by the producers and not the external benefits, causing market failure
  • If the external benefits were considered, the quantity of goods and services produced would increase, and they would be sold at a lower price

  
• What are the positive externalities of consumption?

  • Positive externalities of consumption are created during the consumption of a good/service
  • The externalities are caused by consumer demand and result in a positive external impact on a third-party
  • Only private costs are considered by consumers and not the external costs, individuals will under-consume these goods/services causing a market failure
  • If the external benefits were considered, the demand would increase, and the goods would be sold at a higher price
  • An example of a positive externality of consumption is vaccinations.

  
• What happens when the MPB is less than the MSB?

  • As the MPB are less than the MSB, this results in an under-consumption equal to Qopt - Qe
  • At any quantity consumed below Qopt, the MSB is greater than the MSC, resulting in lost benefits and a deadweight loss to society (pink triangle)
  • To be socially efficient, more factors of production should be allocated to producing this good/service
  • There is an opportunity for government intervention (subsidies, partial provision, etc.) to force this market to be more socially efficient and reduce the overall welfare loss to society