Positive Externalities

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6 Terms

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Positive Externalities

Benefits which affect third parties outside the price mechanism

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Diagram

Underconsumption between social optimum level and actual market price

<p>Underconsumption between social optimum level and actual market price</p>
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Underconsumption

When there is potential welfare gain

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Ways to solve positive externalities

  • Subsidies

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Subsidies

  • Internalizes positive externalities by moving the Marginal Curve accordingly and maximizes welfare

  • Must be at socially efficient quantity

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Maximum Price

  • Encourages increased consumption of a good or service by setting a price ceiling below equilibrium price.

  • Leads to disequilibrium and excess demand.