Positive externalities•Positive externality refers to positive benefit received by a third part who is not the part of market transaction.who is not the part of market transaction.•Positive externalities present, prices do not fully equal prices do not fully equal the marginal social benefit of a good or service.–Marginal external benefit (MEB) is the benefit of additional output accruing to partiesaccruing to partiesother than buyers or sellers of the good or services.–Marginal private benefit (MPB) is the marginal benefit that consumers basetheir decision on. –The Marginal Social Benefit (MSB) = MPB +MEB ; when the positive externalities exist.•Positive externalities, on the other hand, are always under-suppliedby the market.This is because the marginal private benefit is lower thanthe marginal social benefit.
Cont. •The intersection of the social demand curve and the supply curvedetermines the optimal output level.•The optimal output level is greater than the market the market equilibrium quantity.equilibrium quantity.•The optimal price is less than the market equilibrium market equilibrium price. price. Take our education example. If someone was trying to decide if they wanted to go on to college, they would weigh the cost of doing so again their personal benefit. People will attend college as long as their marginal private benefit is greater than or equal to marginal cost. But if the market were working efficiently, they would decide to attend as long as marginal social benefit was at greater than or equal to marginal cost.
PPePQQeMCMSBMPBFigure 3.2: Positive Externality
Externalities and Market Inefficiency•Externalities cause markets to be inefficient, and thus fail.•Demand curve reflects the value to the buyersthe value to the buyersand supply curve reflects the cost to the seller.he cost to the seller.•At market equilibrium, total surplus is maximized•In the absence of externalities, market equilibrium is efficient •Both decision-makers failfailto take account of the external effects of their behavior•We need to design appropriate policydesign appropriate policymeasure to control externality.
Dealing With Externalities•There area variety of ways to deal with externalitiesa variety of ways to deal with externalities. These include:–Assigning property rights – Suppose there is a firm that pollutes a nearby river as a result of production, and that same river is used for recreational swimming.–Command/Control – The government might place a limit on the amount of pollution firms are allowed to produce in an attempt to solve the market inefficiency.–Taxation/Subsidies– The government can tax things that create negative externalities, and subsidize those things that create positive externalities.–Permits – Firms can buy and sell permits from each other for the right to pollute. This creates incentive to find efficient ways of production so you can sell unneeded permits.
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