Positive Externalities
This occurs when the consumption or production of a good causes a benefit to a third party.
· 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
· Therefore with positive externalities the benefit to society is greater than your personal benefit. Therefore Social Benefit > Private Benefit
Diagram of Positive Externality
- In a free market consumption will be at Q1 because Demand = Supply (private benefit = private cost )
- However this is socially inefficient because Social Cost < Social Benefit. Therefore there is under consumption of the positive externality
- Social Efficiency would occur at Q2 where Social Cost = Social Benefit
For example In the real world without govt intervention there would be too little education and public transport.
Essays and Revision Notes on Market Failure
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