Positve Externalities

Question 1

What is positive externalities

Answer 1

POSITVE externalities are the spill over benefits to 3rd parties that are not directly involved in production/consumption of goods , no payment made for benefit gained.

Question 2

What are common type of positive externalities

Answer 2

Healthcare , education

Question 3

What is the graph for positive externalities

Answer 3

Draw out and check
Q1 less than Q2 leading to underconsumption/underproduction

Question 4

Graphical analysis for graph

Answer 4

1. Assuming that there are no negative externalities
2. There’s a divergence between MPB and MSB due to MEB
3. The current market equilibrium is at Q1 where MPB = MPC consumer/producers welfare is maximised
4. However, socially optimal level is at Q2 where MSB = MSC where society’s welfare is maximised and allocative efficiency is achieved.
5. Since Q1 is less than socially optimal level at Q2 , there is underproduction/underconsumption of the good
6. There is a deadweightloss at area A , since every additional unit of output from Q1 to Q2 adds more to benefit than cost.
7. Since society’s welfare is not maximised and allocative efficiency is not achieved, thus market fails ,government would have to intervene, to solve Market failure.