Positive Externalities

Question 1

What is a positive externality in consumption

Answer 1

A positive externality is a benefit to the 3rd party as a result of the actions of consumers

Question 2

What are some examples of positive externalities in consumption

Answer 2

• education
• healthcare -> vaccinations
• exercise and healthy eating -> productivity

Question 3

How does education act as a positive externality

Answer 3

• education leads to higher productivity (benefit to employers)
• education leads to higher incomes -> higher tax revenues -> more spending on overall economy (benefit to everyone)

Question 4

What is the benefits of consuming health care

Answer 4

Vaccinations -> protect people form diseases contagious diseases

Question 5

Draw a positive externality in consumption

Answer 5

Msb > mpb

Question 6

Analyse positive externalities in consumption

Answer 6

• consumers act out of self interest and only care about their private benefits
• this leads to an underconsumption
• misallocation if resources resulting in a deadweight welfare loss due to the additional units not being consumed

Question 7

What is a positive externality in production

Answer 7

Positive externality in production is a benefit to the third party as a result of the actions of producers

Question 8

What is an example of positive externality in production

Answer 8

• in house training
• research and development

Question 9

Draw a positive externality in production

Answer 9

Mpc > msc

Question 10

Analyse prositve externality in production

Answer 10

• producers act out of self interests and do not care about the social benefit and only take into account private benefits
• these leads to an under production
• misallocation of resources resulting in a deadweight welfare loss