Using an appropriate diagram, explain how positive externalities are a type of market failure

Question: Using an appropriate diagram, explain how positive externalities are a type of market failure.

Definitions:

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.

Triple A:

  • 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.

Main ideas:

  • Positive externality

Powerpoint Slides:

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This entry was posted in Economics, Section 2. Bookmark the permalink.

One Response to Using an appropriate diagram, explain how positive externalities are a type of market failure

  1. Peter Anthony says:

    This type of preparation will serve you well in the exam.

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