Chapter 6.2

Question 1

What happens when there is a positive consumption externality?

Answer 1

The free market underallocates resources to the production of the good and too little of it is produced relative to the social optimum

Question 2

In general, what do positive externalities lead to?

Answer 2

An underallocation of resources to the good

Question 3

Merit good

Answer 3

A good that is desirable for consumers but is underprovided

Question 4

Reasons for underprovision of merit goods

Answer 4

Good may have positive externalities
Low levels of income and poverty
Consumer ignorance

Question 5

Ways of correcting positive consumption externalities

Answer 5

Government legislation and regulation
Education and awareness creation
Nudges
Direct government provision
Subsidies

Question 6

What does correction of positive consumption externalities usually do?

Answer 6

Increases demand to move MPB closer to the MSB curve through legislation or education and awareness creation, or increases supply and shifts MPC in order to increase production and consumption

Question 7

Advantages and disadvantages of policies to correct positive externalities

Answer 7

Direct government provision and subsidies are effective and can lower the price of the good
Government provision and subsidies use up tax money
Hard to measure the size of external benefits
May be political
Hard to design effective nudges
Legislation or education and awareness creation may have limited effectiveness
Legislation or education and awareness creation might raise prices