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Positive xternalities
Positive externalities are benefits to third parties from certain economic activities. Activities that generate positive externalities include education and training, public broadcasting, healthcare, vaccination programs, and environmental protection. These external benefits are not fully captured by the private market. As a result, the free market underprovides goods and services with positive externalities, leading to a net loss of social welfare. Government intervention, such as subsidies or regulation, may be needed to encourage the optimal level of supply that accounts for positive external spillovers. However, accurately quantifying externalities and avoiding overconsumption can be challenging issues for policymakers.
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Positive xternalities
- 1. Positive Externalities AS Microeconomics
- 2. A quick recapon externalities An externality exists when the action of one agent unavoidably affects the welfare of another agent. The affected agent may be a consumer, giving rise to a consumption externality, or a producer, giving rise to a production externality
- 3. What are positiveexternalities? Positive externalities create benefits to third parties Activities said to generate positive externalities include: Social returns from investment in education & training Benefits from high quality public service broadcasting Positive benefits from health care and medical research Benefits from vaccination and immunization programmes Flood protection systems & fire safety equipment Restored historic buildings and monuments Social benefits from protecting environmental resources
- 4. Social benefits Where there are positive externalities the social benefit of production and/or consumption exceeds the private benefit
- 5. Social benefits explained Private + External benefits = Social Benefits Benefits Benefits to Benefits to others of Total benefits to individual individual society of a consumers or consumers or firms given economic firms of their economic activity activity economic activity Benefits to Benefits to third Total benefits first parties - parties - others to society – individuals everyone
- 6. Positive spill-overs Flood protection schemes, immunization and galleries and museums all provide external benefits Left to itself, would the free- market fail to provide sufficient products that yield positive externalities?
- 7. Positive externalities fromeducation and training Improved social skills and awareness of citizenship Greater long-term contribution to the economy Higher productivity Diffusion of knowledge and understanding Improved employability / reduced risk of structural unemployment Impact on international competitiveness from an improvement in human capital All of the above should help to contribute to a higher trend rate of growth Higher expected earnings might provide increased tax revenues for the government
- 8. Positive externalities andmarket failure Costs and Benefit s Marginal Private Cost = Marginal Consumer Social Cost Surplus Margin Produce al r Surplus Social Benefit Margin al Private Benefit Equilibriu Q1 Q2 Output m output
- 9. Positive externalities andmarket failure Costs Gain to and other Benefit people s Marginal Private Cost = Marginal Consumer Social Cost Surplus Margin Produce al r Surplus Social Benefit Margin al Private Benefit Equilibriu Q1 Q2 Output m output
- 10. Positive externalities andmarket failure Costs and Benefit s Marginal Private Cost = Marginal Social Cost Margin al Social Benefit Margin In a free market al consumption will be at Q1 Private because Demand = Supply Benefit (private benefit = private cost ) Q1 Q2 Output
- 11. Positive externalities andmarket failure Costs and Benefit s Marginal Private Cost = Marginal Social Cost Margin al Social Benefit Margin However this is socially al inefficient because Social Private Cost < Social Benefit. Benefit Therefore there is under consumption of the Q1 Q2 Output positive externality
- 12. Positive externalities andmarket failure Costs and Benefit s Marginal Private Cost = Marginal Social Cost Margin al Social Benefit Margin Social Efficiency would al occur at Q2 where Social Private Marginal Cost = Social Benefit Marginal Benefit Q1 Q2 Output
- 13. Positive externalities andmarket failure Costs Welfare loss from and the good being Benefit under-consumed s Marginal Private Cost = Marginal Social Cost Margin al Social Benefit Margin Under-consumption of al products with positive Private externalities leads to a net Benefit loss of social welfare – shown in the diagram above Q1 Q2 Output
- 14. Encouraging supply toreap social returns
- 15. Government intervention options Government subsidy either to producer or consumer Reduce private cost of consumption or reduce cost of supply Lower costs should cause an expansion of demand E.g. Student grants and low-cost loans? Subsidies to fund free entrance to museums and heritage sites Providing free vaccines at the point of use Command and Control techniques Minimum school leaving age Compulsory health immunisation programmes Improved information flows to potential consumers Health awareness programmes Goods with positive externalities are often public goods – e.g. Investment in reduction programmes for communicable diseases
- 16. A subsidy tothe producer Costs Welfare loss from and the good being Benefit under-consumed s MPC=MSC MPC with subsidy MSB A producer subsidy would MPB cut the marginal cost of supplying to the consumer – a lower price would bring about an expansion of Q1 Q2 Output demand towards the socially optimal level
- 17. Evaluation points Often difficult to identify the positive externalities and then put a market value on them People/organisations may have an incentive to over-estimate the spill-over benefits when lobbying for financial assistance Providing services ‘free at the point’ of need may cause over-consumption Subsidies always carry an opportunity cost Regulation consumption involves a cost too
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