Cambridge International as and a level Economics Ebook

195
Chapter 8: Government microeconomic intervention

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Th
e provision of information is also appropriate in this 
case of market failure. Warnings and photographs are now 
placed on packets of tobacco products to deter smoking; 
information is provided on the packaging of many 
processed food products to indicate their sugar and salt 
content as well as their nutritional qualities. Bottled water 
usually contains details of the composition of the contents. 
Another example is for air travel, where it is possible for 
passengers to know the carbon footprint they are causing 
and how this might in some way be off set.
Positive production externalities
Th
ese occur when there are positive spillover benefi ts 
created by producers. A particularly good example is in the 
case of inoculations; vaccines that have been developed to 
combat serious medical conditions like polio, cholera and 
smallpox benefi t not only those receiving them but also 
the community as a whole. Th
e same is true in other fi elds 
of research and technological development. Initially the 
inventor but subsequently many others are able to benefi t 
from the private costs that have been spent by a fi rm.
Figure 8.7
 shows how a subsidy to the fi rm generating 
these benefi ts would correct market failure. Here, MSC is 
below MPC. Th
e market equilibrium is at 
P
1
Q
1
; the market 
under allocates resources at this point. It is implied that the 
government should provide a subsidy to the fi rm equal to 
the external benefi t. As a result, there will be an increase 
in the quantity produced to 
Q
2
and a lower price at 
P
2
. 
Allocative effi
ciency is now being achieved.