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Positive Production Externalities

Positive externalities are created when firms train employees, improving manpower, or invest in research and development, creating new technologies that benefit society. The marginal social cost is below the marginal private cost due to positive externalities. The optimal social production level is Q* but the market equilibrium is at Q1, indicating underallocation of resources. Subsidies can be provided to firms producing goods with positive externalities, lowering the marginal private cost curve to the marginal social cost curve, increasing output closer to the optimal level of Q* and lowering price from P1 to P2.

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Jihene Samari
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124 views2 pages

Positive Production Externalities

Positive externalities are created when firms train employees, improving manpower, or invest in research and development, creating new technologies that benefit society. The marginal social cost is below the marginal private cost due to positive externalities. The optimal social production level is Q* but the market equilibrium is at Q1, indicating underallocation of resources. Subsidies can be provided to firms producing goods with positive externalities, lowering the marginal private cost curve to the marginal social cost curve, increasing output closer to the optimal level of Q* and lowering price from P1 to P2.

Uploaded by

Jihene Samari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

PositiveProductionexternalities

Thesearepositiveexternalitiescreatedduetoproductionofcertaingoodsandservices.Examplesinclude,when
firmstraintheiremployeeswhichresultinbettermanpowerorinvestinresearchanddevelopmentandsucceed
indevelopingnewtechnologieswhichbenefitsthesociety.
Duetothefactthatpositiveexternalityisproduced,theMSCliesbelowtheMPC.Thediagrambelowillustrates
positiveproductionexternalities.Aswecanseethatthesocialoptimallevelofproductionofthesegoodsshould
beQ*,howeverthereisunderallocationofresourcesandthusthereisoutputisatQ1.

Correctivepositiveproductionexternalities
Subsidiescanbeprovidedtofirmswhichproducethesegoods.TheeffectwillbetheloweringofMPCandthus
theMPCwillmoredownwardtoMSC.ThiswillincreasetheoutputtoalevelQ2neartothesociallyoptimallevel
Q*.ThepricewillalsofallfromP1toP2.

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Market Failure Series: Positive Externalities of Production--Diagram and Solu...

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