With positive externalities, production and/or consumption generates spill over benefits to 3rd parties leading to social benefit being greater than private benefit. Market failure occurs when goods and services that lead to positive externalities are under-consumed and under-provided by the normal working of the price mechanism. So how best to incentivise activities that lead to positive externalities? This is where you can mix analysis and evaluation to strong effect. Are government subsidies the default policy option? If so – should the government subsidise producers or give financial assistance directly to consumers? What are the alternative options and will they be effective?

1. Market Failure – Positive
Externalities

2. Market Failure
Positive
Externalities

3. Positive Externalities
• Positive externalities create 3rd party spillover benefits
• The result is that the social benefit of production/consumption is
greater than the private benefit
• External benefits might be in the form of
• Lower costs for other parties
• Increased revenues / profits for other parties
• Increased utility / satisfaction for other parties
• Positive externalities are associated with merit goods and services
• As with negative externalities, discussion of what counts as a
positive externality and the value attached to it, will nearly always
involve a value judgement.
Positive externalities occur when production and/or consumption
create external benefits on third parties outside of the market.
Key point: For ‘goods’ such as contraception and abortion, it is not
always clear whether the externality is positive or negative

4. Positive Production & Consumption Externalities
Positive production externalities Positive consumption externalities
• Flood defence projects benefit
the whole community
• Healthcare / Childcare / flu and
other vaccines made available to
the population
• Projects to reduce deforestation
• Education / Learning /
Community Work
• Apps that promote the “sharing”
of scarce resources
• Pest control / gardening
• Research and development -
spillovers for other businesses
• Usage of mass transport services
instead of private motoring
• Bee-keeping and pollination • Youth clubs and apprenticeships

5. Positive Externalities in Consumption – Market Failure
Costs,
Benefits
£s
Output
Marginal
Private Cost
P1
Q1
Marginal Private
Benefit
Positive externalities cause social benefit to be > private benefit
Social optimum output (Q2) is higher than private optimum (Q1)
Marginal Social
Benefit
P2
Q2
If the market ignores
positive externalities, there
will be under-consumption

6. Subsidising a Merit Good to overcome Market Failure
Costs,
Benefits
£s MPC
P1
Q1
MPB
A subsidy reduces the marginal private cost of consumption and
ought to lead to an expansion of demand towards social optimum
MSB
P2
Q2
MPC +
Subsidy
External benefit
Subsidy per unit
Remember
importance of
price
elasticity of
demand
Output

7. Externalities in Production and Consumption
In this example there are both positive and negative externalities
Social optimum output (Q2) is lower than private optimum (Q1)Costs,
Benefits
£s
Marginal
Private Cost
P1
Q1
Marginal Private
Benefit
Marginal Social
Benefit
P2
Q2
Marginal
Social Cost
Evaluation
might include
considering
whether the
market failure
is trivial or
significant
Output

8. Positive Externalities: The Decline of Public Libraries
Library usage in the UK has decreased
over the years. During the most recent
year measured, 288 million visits were
made to public libraries, down from a
decade high of 347 million visits in the
2005/06 year. An estimated 36 percent of
individuals in England visited a library in
2013, down from 48 percent in 2005.
External Benefits from Public Libraries
• Community hub – help to address
external costs of loneliness
• Free access to knowledge and public
information and advice
• Increased labour mobility – e.g. access
to job search facilities
• Positive spillovers from free facilities
for people to study, work and meet
• People in poorer communities more
likely to visit and use libraries
Reasons for declining usage of libraries
• Rise of e-books / cheaper paperbacks
• Perception among many younger
people that libraries are out dated
• Deep cuts in local authority funding
Approaches to increase use of libraries
• Sharing of digital network resources
• Investment in free Wi-Fi, coffee shops
• National library card to allow users to
visit / use libraries across the country

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students, teachers and
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@tutor2u_econ

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