Scribd
Upload
194 views20 pages

Positive Externalities of Production and Consumption

Positive externalities occur when production or consumption of a good provides spill-over benefits to third parties. The free market underprovides goods with positive externalities since not all benefits are captured by producers and consumers. Government intervention can help correct this market failure. Direct provision, subsidies, legislation, and advertising can shift supply or demand curves to increase output to the socially optimal level. However, it is difficult for governments to accurately measure external benefits and allocate funds efficiently across all goods.

Uploaded by

Mandeep Kaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
194 views20 pages

Positive Externalities of Production and Consumption

Positive externalities occur when production or consumption of a good provides spill-over benefits to third parties. The free market underprovides goods with positive externalities since not all benefits are captured by producers and consumers. Government intervention can help correct this market failure. Direct provision, subsidies, legislation, and advertising can shift supply or demand curves to increase output to the socially optimal level. However, it is difficult for governments to accurately measure external benefits and allocate funds efficiently across all goods.

Uploaded by

Mandeep Kaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 20

POSITIVE

EXTERNALITIES OF
PRODUCTION
• Definition: when the production of a good or service creates spill over benefits
that helps a third party not involved in the market transaction . Individuals,
groups of people, ecosystem/environment etc. Such goods may be
underprovided by the free market, since the benefits are shared by society as
whole, not just the private producers and consumers. .
• Medical Research: For example coronavirus research, or research for improved
and better medical treatment in case of deadly or contagious diseases.
• Tree farms: Trees also serve environmental functions of capturing CO2 from the
atmosphere.
• Sports stadium : External benefits enjoyed by a city (economic development )
when a sports stadium gets built.
• When there is a positive production externality, the free market under allocates
resources to the production of the good
• too few resources are allocated to its production, and too little of it is produced.
• This is shown by Qm < Qopt and MSB > MSC at Qm
Graphical Representation
1. MPB and MSB: D= MPB=MSB(there are no consumption
externalities)
2. MPC and MSC: S= MPC>MSC. The private costs are higher than
the socials (negative external costs e.g., benefits from
producing the good.)
3. Qe and Qso : The socially optimal quantity is greater then the
equilibrium quantity (free market). Resources are under
allocated towards the production of good with positive
externalities.
4. Potential welfare Gain : Represents the increase in societal
welfare that would be enjoyed if output occurred at the socially
optimal level (QSO)
Correcting Positive production Externality
• Direct Government Provision:
 Engage in Research and Development for new technology , medicine,
pharmaceutical. Direct training for workers.
. Governments pay for such activities with government funds, raised through
taxes

Correction of positive production externalities involves shifting the MPC curve


downward toward the MSC curve through direct government provision or by
subsidies. For allocative efficiency to be achieved, the quantity produced and
consumed must increase to Qoptas price falls to Popt
Positive Externalities of Consumption
• Definition:
• Anytime the consumption of a good or service creates spill over benefits enjoyed by a
third party not involved in the market transaction. A market failure results because
the quantity produced by the free market will be less then the social optimal quantity.
• Examples :, Public transportation, health care, low income housing, job training and
vaccines…….
• Education

Social benefit
from productive Lower Lower Crime rate
Economic
workforce unemployment
development
• Health Care

More Higher Standard of Higher Rate of


Productive Living Economic Growth

• Merit Goods: Definition, reason for under provision(goods may have positive
externalities, low levels of income and poverty, consumer ignorance ). Page 116 and 117
When there is a positive consumption externality, the free
market under allocates resources to the production of the
good, and too little of it is produced relative to the social
optimum

little of it is produced relative to the social optimum. This is


shown by Qm < Qopt and MSB > MSC at Qm

MSB > MPB, therefore the free market equilibrium quantity is


less then the socially optimal quantity. There is a potential
welfare gain from more of the good being produced and
consumed.
• The case of merit goods pg 116
Correcting Positive consumption
externalities
• Legislation: Promote greater consumption of goods with positive externalities.
• For example, many countries have legislation that makes education compulsory
up to a certain age (note that education is a merit good).
Demand for education increases, and the demand curve D1 = MPB
shifts to the right (or upward)

Ideally, it will shift until it reaches the MSB curve, where D2 =


MSB, and Q opt is produced and consumed.

• Advertising : Government can persuade consumers to buy more goods with Positive
externalities encourage the use of sports facilities for improved health.
•
• Direct government provision: The most important examples include
government (public) provision of education and health care in virtually all
countries in the world. Education and health care are merit goods
Direct government provision
has the effect of increasing
supply and therefore shifting
the supply curve S rightward (or
downward) to S + government
provision

To achieve the social optimum


Q opt, the new supply curve
must intersect MPB at the level
of output Q opt, as seen in the
figure.

At the new equilibrium, price


falls to Pc, Q opt is produced
and allocative effi ciency is
achieved
• Correction of positive consumption externalities involves either increasing
demand and shifting the MPB curve towards the MSB curve through legislation or
advertising
• increasing supply and shifting the MPC curve downward by direct government
provision or by granting a subsidy.
• Both demand increases and supply increases can lead to production and
consumption at Qopt and the achievement of allocative efficiency.
• The price paid by consumers increases when demand increases, and falls when
supply increases
Evaluating policies to correct positive production and consumption externalities

Government Provision and Subsidies:


Advantages:
Both direct government provision and subsidies are widely used as methods to
deal with positive consumption externalities, positive production externalities.
Both methods are very effective in increasing the quantity of the good produced
and consumed.
Both have the added advantage of lowering the price of the good to consumers
(though Popt is not achieved).
• Difficulties involved in achieving the optimum results (where MSC = MSB)
• 1. Both direct government provision and granting of subsidies involve the use of
government funds that rely on tax revenues.
• Government can use this fund(tax revenue) to various alternative uses.
2. It involves opportunity cost, as it is not possible for the government to directly
provide or subsidise all goods and services with positive externalities choices
must be made on :
(a) Which goods to be supported and
(b) By how much they should be supported.
• Ideally it should based on economic criteria i.e., amount of social benefits
expected in relation to the cost of providing them.
• Objective is to maximise the benefits for each good and service to be provided
or subsidised for a given cost.
• However, in practice it is very difficult :
• measure the size of the external benefits: in order to calculate efficiently, which
goods and services should be supported, and the level of support they should
receive. For example in case of grant of subsidies.
• Political in nature : different groups compete with each other over who will
receive the most benefits
• Governments are often susceptible to political pressures and sometimes make
choices based on political rather than economic criteria.
• Legislation and advertising :
• Limitations:
• 1. calculating the size of external benefits
• 2. Only sometimes can they be effective: For example, they can have very
positive effects in certain cases (such as legislation requiring schooling up to a
minimum age or advertising on the importance of good nutrition).
• Ineffective (for example, they cannot on their own increase consumption of health
care services and education to the optimum level)
• Moreover, they have the further effect of raising the price of the good to
consumers, which may make the good unaffordable for some consumer groups
• legislation and advertising sometimes can be used more effectively if they are
implemented together with direct provision and subsidies
• A good example is education, where compulsory schooling up to a certain age
(legislation) goes together with direct government provision

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy