Positive Externalities
Definition of Positive Externality.
This occurs when the consumption or production of a good causes a benefit to a third party.
·For example, 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.
A farmer who grows apple trees, provides a benefit to a beekeeper. The beekeeper gets a good source of nectar to help make more honey.
Therefore with positive externalities the benefit to society is greater than your personal benefit.
Therefore with a positive externality the Social Benefit > Private Benefit
- Remember Social Benefit = private benefit + external 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.
See: Subsidy on positive externality
Related
Essays and Revision Notes on Market Failure
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