Positive externality in consumption and production

Positive externalities in consumption

Benefits to 3rd parties as a result of consumers

Eg. Healthcare, Education, Exercise

Positive externality in consumption diagram

Individual consumers are ignoring the full social benefit of their actions and only consider private benefits due to self interest . This means that MPB is less than MSB. As a result the market allocates resources at the private optimum p1q1 which leads to underconsumption and underproduction of these goods. This leads to a misallocation of resources as social benefits exceed social costs creating a deadweight welfare loss at triangle abc.

Positive externalities in production

Benefits to 3rd parties as a result of the actions of producers

Eg. Rand D in work training

Positive externalities in production diagram

Producers or firms only consider their private costs and not their full social cost due to self interest. This means that MPC is greater than MSC. As a result resources are being allocated at p1q1 at the probate optimum leading to an underproduction of these good from q1 to q* resulting in a misallocation of resources. This also creates a deadweight welfare loss at the triangle abc