positive externalities Flashcards
why does government provide and subsidise
by providing them for free or subsidising their cost, government encourages people to use these goods
this often benefits the rest of society
positive externalities
benefits affecting third parties outside price mechanism
examples of positive consumption externalities
getting vaccinated,
eating healthy food, less likely to be ill, reduces nhs spending
examples of positive production externalities
bee keepers producing honey from bees, bees pollinate nearby crops, benefits local farmers
or new transport- helping people get to work
producing wind turbines, solar energy- reduce climate change
marginal benefit
highest price a consumer is willing to pay for a good
social costs and benefit
social costs is private cost
social benefit is private benefit and external benefit
welfare
social benefit -social cost
underconsumptoin
losing out on welfare we could have if we
consumed
gap between socially efficient quanitity and market equilibrium
subsidy
grant from a government to a firm to increase supply
to fix underconsumption it will provide a subsidy
reduces costs of production, shift supply to right, producers willing to supply more
maximum price
The maximum price, Pmax, prevents the price from rising above Pmax. So the market is stuck in disequilibrium at Pmax, creating excess demand.
Subsidy to internalise a positive consumption externality
To correct a positive consumption externality, a subsidy must be set = the size of the external benefit between MSC and MPC at Qs.
Maximum price
highest price a good can be legally sold for.
E.g. New York’s rent controls which set a maximum price on the rent a landlord can charge a tenant for a flat.
Note: a maximum price must be set below the market price otherwise it will have no effect.
Positive consumption externalities (or external benefits of consumption)
When the consumption of a good creates benefits to third parties outside the price mechanism.
E.g. consuming education will make you more productive and therefore also help your future employers.
Positive production externalities (or external benefits of production)
When the production of a good creates benefits to third parties outside the price mechanism.
E.g. producing honey requires bees to be raised; these bees will pollinate nearby crops benefitting farmers.
