Positive Externalities 2022.pptx

Positive externalities

1. Positive Externalities

2. What is a positive externality A Positive externality occurs when the consumption or production of a good causes a benefit to a third party. For example: When you get a COVID-19 vaccine, you receive a private benefit (you become less susceptible to catching it) but there is also a social benefit, prevents the spread within the community. (positive consumption externality) A farmer who grows apple trees provides a benefit to a beekeeper. The beekeeper gets a good source of nectar to help make more honey. (positive production externality)

3. Private & Social Benefit Private benefit: benefit to the person who buys and consumes the good Social benefit: the total benefit to all of society A positive externality occurs when the Social Benefit is > than The Private benefit. Remember Social Benefit = private benefit + external benefit.

4. EXTERNALITIES AND MARKET INEFFICIENCY Positive Consumption Externalities Immunization Education Museums Public Transport

5. EXTERNALITIES AND MARKET INEFFICIENCY Positive Production Externalities Research and Development Training and Development of workers Renewable resources and energy

6. Positive externalities from education 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

7. Private benefits & Social benefits Private benefit The utility derived from consumption (for a consumer) The revenue accruing to a producer Social benefit Where there are positive externalities the social benefit of production and/or consumption exceeds the private benefit

8. Social benefits explained + E x ternal b e nefi t s = Benefits to others of individual consumers or firms economic activity Social Benefits Total benefits to society of a given economic activity Private B e nefi t s Benefits to individual consumers or firms of their economic activity Benefits to first parties - individuals Benefits to third parties - others Total benefits to society – everyone

9. 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?

10. Positive Consumption externalities and market failure Outp u t Price Marginal Private Cost = Marginal Social Cost Mar g in a l Social Benefit Mar g inal Private B e n e fit Q2 Q1 Consumer Surplus Produce r Surplus Equ i librium output

11. Positive externalities and market failure Outp u t Mar g inal Priv a te B e n e fit Marginal Private Cost = Marginal Social Cost Q2 Q1 Consumer Surplus Producer Surplus Equ i libriu m output Gain to other people Marginal Social Benefit Price

12. Positive externalities and market failure Outp u t Mar g inal Priv a te B e n e fit Marginal Private Cost = Marginal Social Cost Mar g inal Social B e n e fit Q2 Q1 In a free market consumption will be at Q1 because Demand = Supply (private benefit = private cost ) Price

13. Positive externalities and market failure Mar g inal Priv a te B e n e fit Marginal Private Cost = Marginal Social Cost Mar g inal Social B e n e fit Q1 Q2 Outp u t However this is socially inefficient because Social Cost < Social Benefit. Therefore there is under consumption of the positive externality Price

14. Positive externalities and market failure Outp u t Mar g inal Priv a te B e n e fit Marginal Private Cost = Marginal Social Cost Mar g inal Social B e n e fit Q2 Q1 Social Efficiency would occur at Q2 where Social Marginal Cost = Social Marginal Benefit Price

15. Positive externalities and market failure Outp u t Mar g inal Priv a te B e n e fit Marginal Private Cost = Marginal Social Cost Mar g inal Social B e n e fit Q2 Q1 Welfare loss from the good being under-consumed Under-consumption of products with positive externalities leads to a net loss of social welfare – shown in the diagram above Price

16. Positive Consumption externalities and market failure Outp u t Price Marginal Private Cost Mar g in a l Social Cost Mar g inal Private Benefit = Marginal Social benefit Q2 Q1 Consumer Surplus Produce r Surplus Equ i librium output

17. Positive externalities and market failure Outp u t Marginal Private Cost Q2 Q1 Consumer Surplus Producer Surplus Equ i libriu m output Gain to other people Marginal Social Cost Price Mar g inal Private benefit = Marginal Social benefit Because there are positive externalities in production, the social marginal cost of production is less than the private marginal cost of production.

18. Positive externalities and market failure Outp u t Mar g inal Priv a te Benefit = Marginal Social Benefit Marginal Private Cost Q2 Q1 Consumer Surplus Producer Surplus Equ i libriu m output Gain to other people Marginal Social Cost Price In a free market, a firm will ignore benefits to third parties and will produce at Q1 (free market outcome) (private benefit = private cost )

19. Positive externalities and market failure Outp u t Mar g inal Priv a te Benefit = Marginal Social Benefit Marginal Private Cost Q2 Q1 Consumer Surplus Producer Surplus Equ i libriu m output Gain to other people Marginal Social Cost Price However this is socially inefficient because Social Cost < Private Costs . Therefore there is under product ion

20. Positive externalities and market failure Outp u t Mar g inal Priv a te Benefit = Marginal Social Benefit Marginal Private Cost Q2 Q1 Consumer Surplus Producer Surplus Equ i libriu m output Gain to other people Marginal Social Cost Price Social Efficiency would occur at Q2 where Marginal Social Cost = Marginal Social Benefit

21. Positive externalities and market failure Outp u t Mar g inal Priv a te Benefit = Marginal Social Benefit Marginal Private Cost Q2 Q1 Consumer Surplus Producer Surplus Equ i libriu m output Gain to other people Marginal Social Cost Price Welfare loss from the good being under- Produced However, the socially efficient level will be at Q2 (where social marginal cost = social marginal benefit)

22. Summary Demand curves become marginal benefit curves. Marginal private benefit curves are labelled MPB and marginal social benefit curves (when consumption externalities are included) are labelled MSB. . Supply curves become marginal cost curves. Marginal private cost curves are labelled MPC and marginal social cost curves (when production externalities are included) are labelled MSC. The inefficient equilibrium position is P1 and private costs (supply) are equal and Q1 and is where private (demand) When the impact of a consumption externality is shown, the marginal benefits curve is moved - to the right for a positive externality and to the left for a negative externality. When the impact of a production externality is shown the marginal cost curve is moved — upwards for a negative externality and downwards for a positive externality. The efficient or socially correct equilibrium position is P2 and Q2 and is where social benefits (demand) and social costs (supply) are equal. The deadweight loss is always the area of triangle pointing to the efficient or socially correct equilibrium.