Question

Define with appropriate example, a positive consumption externality and how it leads to inefficiency. Provide two possible solutions to this problem?

Answer 1

A positive externality improves the society as a whole as economic transaction impacts it effects in a positive approach on not only to parties in the transaction but to other's also. The externalities in education, sports centers, and healthcare, have public and social benefits for each individual in the society in both current as well as future generations. The positive externalities are beneficial at no cost to the third party. But the benefit providers do not make any money from the shared benefit thus as a result it's production is less or good is underproduced thus resulting to inefficiencies.

In the case of a positive externality, the government could achieve the efficient outcome by offering a subsidy to either consumers or producers equal to the vertical distance between the marginal private benefit curve and marginal social benefit curve. Also with subsidizing consumers, the government adds the value of the subsidy to the initial private gains given by the demand curve. This would result in shifting the demand curve up, resulting in equilibrium at the efficient quantity.