6.2 Positive externalities of Consumption Flashcards
PEC solution - advert/legislation
PEC solution - Gov provision
PEC solution - Subsidy
What do positive externalities of consumption indicate regarding MSB and MPB?
MSB is greater than MPB
What is the implication of positive externalities of consumption on resource allocation?
It generates a socially underallocation of resources
Define a positive externality of consumption.
The consumption of a good or service benefits third parties who are not directly involved in the transaction, leading to a greater social benefit than private benefit
Give an example of a positive externality of consumption.
- Vaccines reduce the spread of illness in addition to protecting the individual
- Bee keeping
- nature reserves/botanical garden
List examples of positive externalities of consumption.
- Medicine for contagious diseases
- Education
- Public Transportation
Explain why the consumption of health services can be viewed as a market failure.
MSB is greater than MPB as the consumption does not account for the positive external effect on society = underallocation
What is the potential welfare gain from positive externalities of consumption?
Creating a welfare gain through advertisement, education, subsidizing healthcare, and direct government provisions
What is one method the government can use to solve positive externalities of consumption?
Shift MPB toward MSB through legislation or education
or
shift MSC by increasing supply
How does subsidizing firms affect positive externalities of consumption?
Increases supply and shifts the curve to intersect at socially optimal quantity
What is a potential problem with direct government provision of goods or services?
High opportunity cost and potential inefficiencies in production
What is a consequence of positive advertising on consumption?
Increases demand towards the MSB curve
What is a challenge of legislating the consumption of a good?
It may lead to bad feedback from civilians and additional enforcement costs
What is the effect of nudges in correcting positive consumption externalities?
Encourages the use of a certain good or service subtly
What does the correction of positive consumption externalities involve?
Increasing demand or increasing supply through various government solutions
What are the two main approaches to correcting positive consumption externalities?
- Shifting MPB towards MSB
- Shifting MPC downward
PEC - diagram
PEC solution - Legislation/advert
PEC solution - Gov provision
PEC solution - Granting subsidy
