1.3.2 Positive Externalities (in consumption)

Define a positive externality. What is the formula?

When the social benefit is greater than the private benefit.

Social benefit = private benefit + external benefit

Give an example of a positive externality

Vaccination again diseases

Explain why getting vaccinated is a positive externality, use a real word example

When someone gets vaccinated, it is a positive externality because it stop others form getting sick.

For example statistics have shown that is 2 more people get vaccinates 1 fewer person will be off sick from work, and if 4000 people get vaccinated 1 life is saved.

Therefore in this example we can see how the positive externality of getting vaccinated means businesses have less people off sick, meaning that there is more output and increased production, leading to increased profit made by the firms and more tax paid to the government… multiplier effect.

Give some external benefits in consumption

• Education + training

• Using perfume/ deodorant → people smelling good scents and getting pleasure form it

• eating healthy → less pressure on healthcare

• choosing to drive electric cars → less noise pollution/ air pollution

• using public transport → less traffic

• volunteering → helping others

Give some external benefits in production

• Innovation/ entrepreneurship → positive sill over effects on economy e.g renewable technology - the use of the is better for the environment

• locating factories in areas of high unemployment

• Smell of good foods

Draw out a diagram illustrating the positive externality of vaccination

Give some advantages of subsidising education

• would decrease inequality as more can be educated despite background, then they will graduate + get higher skilled jobs + receive higher paying wages

• avoids debt aversion (an issue for students with a poorer background, they fear uni because of the fear on being in debt)

• money can be used to fund better equipment for education sectors - Universities/ schools more attractive to students abroad, bringing more money in from international students

• reduce skill shortages

• increase human capital of workforce

• external benefits internalised - move towards social optimum

Give some disadvantages on subsidising education

• would increase tax for tax payers - they will have less disposable income to spend on other things, less consumption = less money to firms = firms paying less taxes = less tax to government = less spending on welfare/ subsidies

• reduced gov spending on other things

• increases gov deficit (fiscal deficit) → opportunity cost

• time lag → takes time to see benefits

• not everyone who goes to university gets a higher paying job → may be a waste

• brain drain → people after educated may go to other countries where their wages will be higher → government doesn’t benefit from these well - educated individuals

Give some benefits of subsidising public transport

• reduces pressure on roads

• reduces pollution and carbon emissions

• will create jobs in transport in public transport sector

• reduced noise pollution

• makes people more occupationally mobile → they can use public transport to travel further distances to get higher paying jobs

• more geographically mobile → people can travel further distances

• shorter journey times when less cars on the road → reduces transport costs

• more efficient uses of scarce resources

Give some disadvantages of subsidising public transport

• public transport can be inconvenient for some, especially those with disabilities)

• these subsidies are inconsistent → richer public transport sectors are subsidised more than poorer firms

• dependency on subsidies → the sector may begin to work in efficiently because they can afford not to because of the subsidy given

• public transport is an inferior good - even if it is subsidies, demand for it may not necessarily increase.