POSITIVE EXTERNALITIES IN PRODUCTION AND CONSUMPTION Flashcards
A POSITIVE EXTERNALITY in consumption IS A
Benefit to 3rd parties as a result of actions of consumers
a 3rd party in positive xdternality of consumption is
econ agent not involved inte h transaction or activity taking place at all but is still afeected by it
give 3 examples of positive externalities
health care
education
excersise/health eating
explain why health care is a +ve externality
if your vacc against the flu
the 3rd party that benefots are the people in sopciety as gopt less chance of getting the flu
explain why excersise/healthy eating is a +ve externaity
through consumers doing this
3rd party that ebenfit is employers as workers have a higher productivity so work more often and produce more meaning more rev for firms
in a positive externality of consumption explain msb and mpb and why
msb greater than mpb
due tp external beenfits becoming +ve in the sb equation making sb higher than private pebengits
what curve ,oves in +ve externlaity of consumption
d curve
msb=mpb=d
draw graph
y axis - price/cost/benefits
x axis - quantity
msb hihger than mpb
q1 and p1 at mpb = s
q* p* at social optimum of msb = msc
shade in welfare loss pointing towards social optimum
in +ve externality of consumption where does the freemkt allocatre scarce resources
private optimum
mpb=mpc
where does society want aosr in +ve external of consumption
where msb=msc
the social optimum
where is the reallocation of scarce resources shown by on the graph = 1 point
and explain it = 2 points
q1-q*
theres an underconsumption and underproduction
therefore there’s a MAOSR and alocative inefficiency meaning theres a welfare loss
explain why a wl caused in +ve external of consumption
3 points
mention priv optimum quantity and what this tells us about benefits and costs
@q1 social benefits are higher than sc
so we have more beenfits than losses
therfore by not producing extra units from q1-q* we loose out as a society on potential extra social benefit
sum up why weve got a welfare loss and losse out on potential social benefit
units q1-q*
sb>sc
so by not producing up to Q*
we loose out on net social benefit
analys +ve external of consumption
consumers ignoring ..
3 partially/semi fat paragraphs
consuemrs are ignoring the full sb of actions and only considering pb due to self interest
therfore mkt allocates resources at priv optimum meanignthers an underconsumptiona n production compared to what we want as society (social optimum)
therfore theres allcoative inefficinec anda welfare loss as too few resources are being allcoated to this mkt than socially desirable
what are +ve externalities in production
beenfits to 3rd parties as a result of actions of producers
give examples of +ve externality in produjction
high qual in work trainign schems
r&D
explain how high qual in work trainign schems are +ve external of production
3 points
through producers carrying out traing
3rd party who beenfit are other firms who poach workers who’ve benefitted from training w/o having to offer traing themselves
therefore theres a lower cop and higher pm as workers produce more - meanin higher om that cna be reinvested into r&d
explain how r&D is a +ve externality of consumption
firms engaing in exvellent r&d such as new efficient tech
3rd party who beenefit are otehr firms who are able to copy tech w/o spending big amounnt of £ on r&d themselves
therfore they get lower cop w/o big intiiatral cost
explain how msc and mpc are
mpc>msc
because ec becomes negative in equation as 3rd parties are beenfiting so sc are lower in realtion to pc
draw +Ve external in production graph
x axis - price/costs/benefits
y axis - quanity
mpc are higher than msc
draw d line
q1 ansd p1 are priv optimum mpb = mpc
q* and p* lower and wider at msb=msc
draw welfare loss triangle pointing towards social optimum
where does mkt allcoate scarce reosruces in +ve external of production
priv optimum where mpb=mpc
q1 & p1
where does society want resources to be allocated in +ve external of consumption
social optimum where msc=msb
q* and p*
what does q1-q* represent and why
underconsumption and underproduction taking place
therfore allocative inefficieny as mkt fails to allcoate resources at social optimum casuing a welfare loss
what would happen if the extra units from q1-q* where produced
at q1 sb higher than sc so all extra units to q* shoudl be produced
as we get more beenfits than cost in each ase
so by not producing we miss out on extra welfare
analayse +ve external of production graph
indi frims only…
indi firms only consider and care about pc not full social cost so ignore any eb to 3rd party firms due to self interest
so resources are misallocatesd at priv instead of socuial optimum QP*
we have a uc and up taking palce of whatev g/s being created
end result is allcoative inefficncey and a welfare loss
