Wize University Microeconomics Textbook > Externalities/Market Failures
Positive Externalities
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Positive Externalities
A positive externality is when the consumption of a good has a positive effect or external value on society
Example: Flu shots. When people get vaccinated, other people that did not pay for the flu shots also get a benefit because they have a lower chance of getting the flu.
- Private value - the benefit to the people that paid for the good. It is also called the marginal benefit. It is represented by the demand curve.
- External value - the benefit to the people that did not pay for the good. It is also called the marginal external benefit.
- Social value - the total benefit to society. It is also called the marginal social benefit.
- Positive externalities areunderproduced at the private equilibrium.
Correcting Positive Externalities
- To achieve the socially optimal point, the government cansubsidizethe company Example: give grants to universities or subsidies to the flu shot clinics.
- Private solutions - this is when members of society can try to help achieve the socially optimal point. Example: Alumni can donate to their universities. The government can support this by giving tax breaks for those donations.
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Example: Positive Externalities
When there is a positive externality:
A) the good is overproduced at the private equilibrium
B) the social benefit is less than the social cost at the private equilibrium
C) the social benefit is more than the social cost at the private equilibrium
D) the social benefit is equal to the social cost at the private equilibrium
C.
There will be underproduction of the good with a positive externality because the benefit to society is greater than the social cost (example: flu vaccinations have a greater benefit than cost because other people in society then have a lower chance of getting the flu).
Practice: Positive Externalities
In the presence of positive externalities, there is