Positive Externalities
Economics: IB Diploma, topic 1.4.5
Positive Externalities
Positive externalities are beneficial spillovers to a third party or parties, who did not purchase the good or service that provided the externalities.
Private and social benefits
- Private benefits are the benefits a person who consumes a good or service receives; or a new product's benefits, that a company invents, that the company captures.
- For example, Apple benefitting from a new technology that they invented.
- Social benefits are the sum of private and external benefits. External benefits are beneficial spillovers which affect third parties.
Positive externalities example
- Vaccinations are a good example of a positive externality as they are not only a protection for the individual, but they have the positive spillover of protecting others who may become infected.
- The appropriate public policy response to a positive externality, like a new technology, is to help the party creating the positive externality receive a greater share of the social benefits.
- In the case of vaccines, like flu shots, an effective policy might be to provide a subsidy to those who choose to get vaccinated.
Positive externalities example
- This diagram shows the market for flu shots with spillover benefits.
Positive externalities example
- The market demand curve does not reflect the positive externality of flu vaccinations (as it only reflects the marginal private benefit), so only QMarket will be exchanged.
- This outcome is inefficient because the marginal social benefit exceeds the marginal social cost. If the government provides a subsidy to consumers of flu shots, equal to the marginal social benefit minus the marginal private benefit, the level of vaccinations can increase to the socially optimal quantity of QSocial.
Test yourself on Positive Externalities
What does the market demand curve best reflect?
What does the market supply curve best reflect?