Positive Externalities

Question 1

What are positive externalities of production?

Answer 1

Refer to spillover benefits to society caused by the production of a particular good/service

Question 2

Why are positive externalities rare?

Answer 2

Because firms never want to externalize their production benefits

Question 3

What are 3 examples of positive production externalities?

Answer 3

(i) medical research / research & development
(ii) eco-tourism
(iii) training schemes for workers

Question 4

What causes welfare loss in the case of positive production externalities?

Answer 4

Welfare loss is caused by the fact that MSB > MSC at point of production, which means that there is an underallocation of resources to the production of the good/service.

Question 5

What are positive externalities of consumption?

Answer 5

Refers to spillover benefits caused by the consumption of a particular good/service

Question 6

What are 3 examples of positive externalities of consumption

Answer 6

(i) Healthcare
(ii) Education
(iii) Public transport

Question 7

What causes welfare loss in the case of positive consumption externalities?

Answer 7

Welfare loss is caused by the fact that MSB > MSC at the point of consumption of the good/service, which means that resources are being under allocated

Question 8

What are merit goods?

Answer 8

Products that are held desirable for consumers, but are underallocated by the free market
Caused by low levels of income and consumer ignorance