6.1 Positive externalities of production Flashcards
What is a positive externality of production?
The production process of a good that generates a positive effect on a third party or on society as a whole.
Examples include health, research and development, education, or green energy.
When there is a positive externality of production, how does the amount of the good produced by the market compare to the socially optimum amount?
Less than the socially optimum amount.
What is the consequence of a positive externality of production in terms of resource allocation?
There will be an under-allocation of resources to the production of the good or service compared to what is socially efficient.
Provide an example of a positive externality of production.
1 = Bee Keeping => sustainability
2 = Education in the form of employee training
What is the relationship between market equilibrium and socially optimum production in the presence of positive externalities?
Market equilibrium occurs at Qm < Qopt and MSB > MSC at Qm.
Explain why there is welfare loss when production creates positive externalities.
Underallocation of resources to the production of a good creates welfare loss equal to the difference between the MSB and MSC curves.
What are the potential solutions to correct positive production externalities?
- Subsidise firms
- Direct government provision
- postive advertisment
What is the effect of subsidising firms on the MPC curve?
It shifts the MPC curve downward toward the MSC curve.
What is a challenge associated with subsidising firms?
Difficult to estimate subsidy.
What is a potential problem with direct government provision of goods or services?
Government might lack expertise to produce the product.
Fill in the blank: The loss from not producing enough of a good due to positive externalities is equal to the difference between the _______ and _______ curves.
[MSB] and [MSC]
What must happen for allocative efficiency to be achieved in the presence of positive externalities?
The quantity produced and consumed must increase to Qopt as price falls to Popt.
PEP - diagram
social benefit is distance between MPB and MSB
PEP solution - gov provision
PEP solution - Subsidy
