Positive Externalities - Market Failure

Question 1

Define Positive Externalities.

Answer 1

When the consumption or production of a good causes a benefit to a third party.

Question 2

2 examples of a positive externalities.

Answer 2

• When you consume education you get a private benefit. But there are also benefits to the rest of society. E.g you are able to educate other people and therefore they benefit as a result of your education. (positive consumption externality)
• If you walk to work, it will reduce congestion and pollution; this will benefit everyone else in the city.

Question 3

What is a Social Benefit?

Answer 3

Is a benefit to society.

Question 4

What is the link between Positive Externalities and Social Benefits?

Answer 4

With positive externalities, the benefit to society is greater than your personal benefit.

Question 5

Which has a larger benefit? Social Benefits or Private Benefits?

Answer 5

Social Benefits > Private Benefits

Question 6

What is the Social Benefit equation?

Answer 6

Social Benefit = Private Benefit + External Benefits

Question 7

Diagram showing positive externality consumption.

Answer 7

Question 8

In this diagram which is larger? Social Marginal Benefit OR Private Marginal Benefit

Answer 8

Social Marginal Benefit is greater, for example if someone takes the trian it reduces congestion for other travelers.

Question 9

In the free market were will Quatity Demanded be?

Answer 9

At Q1 because Demand = Supply

Question 10

At which point is there Social Efficientcy?

Answer 10

At Q2 were Social Cost = Social Benefit

Question 11

What would happen to education and public transport in the free market if there was no government intervention?

Answer 11

These services will be under-consumed

Question 12

What does Positive Externality Prodution mean?

Answer 12

When a third party benefits from the production of a good.

Question 13

Diagram of Positive Externality in Production.

Answer 13

Question 14

What does Positive Externalities lead to?

Answer 14

Under-consumption and market failure

Question 15

Government policies to increase demand for goods with positive externalities include:

Answer 15

• Rules and regulations – minimum school leaving age
• Increasing supply – government building of council housing to increase stock of good quality housing.
• Subsidy to reduce price and encourage consumption, e.g. government subsidy for rural train services.