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

• Market Failure
• Negative Externalities
• Positive Externalities
• Public Goods
• Merit and Demerit Goods
• Policies to Overcome Market Failure
• Tax on Negative Externality Diagram
• Subsidy on Positive Externality Diagram
• Market Failure at Tutor 2U
• Cost Benefit Analysis