What is it?
Who receives the benefit in a positive production externality?
(Unrelated) Third parties
Label the socially optimal point.
Market equilibrium for MSC (lower line)
What policy is usually used to encourage goods with positive externalities?
Subsidies
A company plants trees around its facility. How is this a positive externality?
It filters air and makes the surroundings cleaner, at no cost to nearby third parties.
How does social marginal cost (MSC) compare to private marginal cost (MPC) when production benefits third parties?
MSC < MPC
Show the deadweight loss area. Label Qmarket, Qsocial, MPC, and MSC.
Triangle between Qmarket and Qsocial and Pmarket
Why does the government intervene instead of leaving it to the market?
Because the market underproduces the good
Why does a firm’s research and development benefit others?
Knowledge leaks or is copied, which lowers other firm's innovation costs.
Underproduction happens because firms ignore benefits to others, so output stays below the socially optimal level.
Label the external benefit.
External benefit= Positive externality. Between MPC & MSC.
Name one real-world good that is subsidized because of positive externalities.
Education, vaccines, green energy, public transport, job training, etc
Raising employee salaries improves company morale and creates more productive workers. Does this create a production externality?
No, because the benefits are private and limited to the firm the employees work in.
What 2 things happen over time if a positive production externality isn’t supported by the government?
Production stays too low, and society keeps missing out on the extra benefits that the activity could provide.
If each extra unit reduces society’s costs by $20 and 50 extra units are socially optimal, calculate the total unaccounted savings.
Hint: How much does one unit save? Total?
$1,000 (50 × $20)
Name one government policy besides subsidies that could increase production of goods with positive externalities.
Tax breaks, grants, regulations/legislations requiring production.
Compare a tax break vs. a direct grant for encouraging production.
Tax breaks reduce effective costs indirectly while grants provide direct funds
A factory installs filters that reduce neighborhood pollution. Which curve shifts in the graph of social vs private cost?
Social marginal cost curve shifts downward relative to private marginal cost.
A factory’s production reduces costs for others, without receiving extra payment. The government creates a per-unit subsidy to reward the firm for these unpriced benefits. Explain how this would affect the graph.
MPC shifts downward to overlap MSC: new Qmarket = Qsocial.
What makes it difficult for governments to set the “right” subsidy for goods with positive production externalities?
They can’t easily measure how large the spillover is, so they may end up giving too much or too little support (over- or under-subsidizing).
An environmental lab creates a system to clean its wastewater before it enters the local river, to reduce disposal costs. Over time, residents downstream notice that the water is slightly clearer and requires less filtering before use. Is this significant enough to justify government intervention? Why or why not?
This is a partial positive production externality. The lab captures most of the benefits, so its production will be maintained even without intervention. Downstream residents gain only minor advantages, so government intervention isn’t necessary.