1.3.4 Positive externalities

Define the term positive externality

The benefit to the third party caused by the consumption or production of a good

Draw a diagram for positive externalities

Using the diagram define the term marginal external benefit

The difference between MPB and MSB is the marginal external benefit and it is the benefits to a third party caused by the private transaction

Using the diagram define the term under production

The free market equilibrium is where the MSC=MPB

The socially optimum equilibrium is where MSC=MSB

The difference between the two is underproduction

Using the diagram define the term welfare gain

Welfare loss is represented by the area above the MPB but bellow MSB this show that for positive externalities how the increase in output will benefit society or welfare gain