Question: Using an appropriate diagram, explain how positive externalities are a type of market failure.
Positive externality – spillover effects on outsiders (people not involved in the production of consumption of the good/service) that are advantageous to them and for which they do not have to pay.
Market failure – occurs when the price mechanism results in an inefficient or grossly unfair allocation of resources.
- Positive externalities occur where the actions of firms and individuals have an effect on people other than themselves.
- In the case of positive externalities the external benefit is added to the private benefit to give the total social benefit.
- An example of a positive externality might be a firm offering advanced driver training for their employees. The firm may do it for private benefit (reduced insurance and accident costs) but this will also have a spillover effect for society in improving safety generally on the roads.
- Positive externality