Positive externalities Flashcards
(8 cards)
What are positive consumption externalities?
A third party or spillover external benefit arising from the consumption of a good for which no compensation is paid eg: vaccination, healthcare, public transport
What are positive production externalities?
A third party or spillover external benefit arising from the production of a good for which no compensation is paid eg: training and education, research and development
When does a positive consumption externality occur?
When MSB > MPB
The social optimum will be where MSC = MSB
The market will under provide and there will be a net welfare loss
What are examples for positive production externalities?
Honey producer benefitting from being near an apple orchard
What are examples for positive consumption externalities?
Healthcare, education, dental care, green spaces/parks
When does a positive consumption externality occur?
When MSC < MPC
The market will under produce since there are too few scarce resources allocated to the production and consumption of the good which leads to a net welfare loss
What policies can help reduce positive externalities?
Providing free services such as the NHS can result in the market quantity well above the social optimum output so it is best used when the positive externality is large
Legislation or regulation
Subsidy - shifts the MPC to the right so the new EQ quantity aligns with the social optimum
Nudge policies - use behavioural methods to encourage more consumption
What does the success of policy intervention depend on?
size of externality
the extent to which the externality can be measured
whether there are unintended consequences
whether there is government failure
opportunity cost of policy - some interventions are expensive
how the policy affects the distribution of income
