Module 7.3 Positive Externalities Lecture

Positive Externalities

• Definition: Positive externalities occur when an activity results in external benefits that lead to the marginal social benefit being greater than the marginal private benefit.

Key Concepts

• Marginal Social Benefit (MSB): The total benefit to society of an additional unit of a good or service, including both private benefits and external benefits to others.

• Marginal Private Benefit (MPB): The benefit that the individual or firm receives from consuming an additional unit of a good or service.

Examples of Positive Externalities

1. Research and Development:

   • A company invests resources into creating new technology.

   • The company captures some benefit by selling its products, but others can also benefit by building upon that technology without directly compensating the original company.

2. Hand Washing:

   • Individual Benefits: Reduced risk of getting sick and feeling cleaner.

   • Societal Benefits: Decreased likelihood of spreading diseases to others, creating a positive externality for society.

Graphing the Concept

• Axes:

  • X-axis: Number of hand washes per day (quantity).

  • Y-axis: Dollars (value/price of hand washes).

• Curves:

  • Marginal Private Benefit Curve: Downward sloping, reflecting diminishing value with each additional wash.

  • Marginal Cost Curve: Upward sloping, indicating increasing costs with more frequent washing.

Analyzing Choices

• Private Decision Point (Qp):

  • Individual's choice of hand washes corresponding to the intersection (Point A) where MPB equals marginal costs (