What is the Social Marginal Benefit (MSB) of a positive externality such as an adult literacy...

What is the Social Marginal Benefit (MSB) of a positive externality such as an adult literacy program sponsored by a transnational corporation? How would the government intervene in such a case to alter the allocation of resources? Use suitable examples of your choice. (10)

Expert Solution

Positive externality arises when the consumption and the production of a good causes benefits to the third party, which is completely excluded from the consumption and production activity.

Basically an adult literacy program having an external benefits, increases the literacy rate which is really good for the wellbeing of a socially as a whole. So, here the MSB is the sum of marginal private benefit (MPB) and external benefit. Now, consider an example of positive externality is education which not make better off the individual but the entire society as a whole. So, there is huge external benefit to the society. Consider the following fig.

Here the free market output is Qm, the intersection of PMB and PMC, => the free market price and quantity are Pm and Qm respectively. The socially optimum level of output is determined by the intersection of PMC and SMB, => the socially optimal level of price and output are “Ps” and “Qs” respectively. So, the socially efficient output is more than the market output.

So, to achieved the socially efficient level of output government should provide subsidy exactly equal to the size of the external benefit. So, the market demand schedule (PMB) will exactly converge to the SMB and the socially efficient level of output will be produced.

Rahul Sunny answered 2 years ago

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