Positive Externalities

Question 1

What are positive externalities of consumption ?

Answer 1

Benefits to 3rd parties as a result of the actions from consumers

MSB is greater than MPB

Healthcare , Education

Question 2

Explain the positive externalities of consumption diagram

Answer 2

There is underconsumption and production of these goods - society loses out on extra social benefit by producing at Q1 instead of Q*

Consumers ignore full benefit of their actions so the goods are sold at the private optimum which leads to underconsumption and production

leads to allocative inefficiency and welfare loss

Question 3

What are positive externalities of production ?

Answer 3

The benefit to 3rd parties as a result of producer action

MSC is greater than MPC

Training and R+D

Question 4

Explain the positive externalities of production diagram

Answer 4

There is under production and consumption + a misallocation of resources so by not producing more at the social level leads to a loss of welfare

Firms only consider the private cost not the social cost due to self interest