Positive externalities

Question 1

Whats a positive externality

Answer 1

beneficial effects on 3rd parties of economic action

Question 2

What are private benefits

Answer 2

Benefits to an individual from on the production/ consumption of a good/service eg better earnings from better education

Question 3

What are external benefits

Answer 3

Benefits to 3 rd parties as a consequence of someones actions, generally take the form of lower costs for other parties or increase revenues/profits

Question 4

What are social benefits

Answer 4

Private + external benefits;

Question 5

How do you work out the size of the positive externality of consumption and production on a graph??

Answer 5

The difference between the marginal social cost/ benefit and marginal private cost/benefit. Social benefits are higher than private benefits, so the government encourage the consumption/ production of these goods

Question 6

Why do the government have to intervene with the consumption of merit goods?

Answer 6

People only recognise the private benefit of these goods’ consumption (MPB), but the government want them to consider the external benefits too and shift the demand curve from MPB to MSB, closer to allocative efficiency wanted by the govt.

Question 7

Which way does a positive externality of consumption shift the demand curve??

Answer 7

shifts it right as Marginal social benefit is higher than marginal private benefit