Cambridge International as and a level Economics Ebook

Positive consumption externalities
In this situation, the positive externality occurs as a result of 
decisions taken that impact favourably on consumers. Th
e 
provision of secondary education is a good example. Being 
educated not only benefi ts the individual; it produces other 
spillover benefi ts for the economy in the form of a better 
educated workforce that is likely to be more productive and 
able to provide an important source of future economic 
growth. Another example is where local rail and bus 
services are subsidised. Th
e subsidy benefi ts all travellers but 
provides most benefi t to low wage earners who are able to 
access a wider geographical range of job opportunities.
Th
e eff ect of a subsidy in this case is shown in 
Figure 8.8
. Th
e equilibrium without government 
intervention is at point F where MPC = MPB or 
D
1
= 
S
1
. 
Th
e marginal external benefi t (MEB) is added to the MPB 
curve to give the MSB, the marginal social benefi t. Th
e 
MSB represents society’s demand curve for the product.
If the government subsidises production of this 
product, then the supply curve shift s to the right from 
S
1
, which equals MPC, to 
S
2
, which equals MPC plus 
the subsidy. Th
e marginal cost of supplying the good 
is reduced by the amount of subsidy and the vertical 
distance GH is equal to the value of the subsidy. 
Figure 8.7 
Positive production externalities
P
2
P
1
0
Price
Quantity
Subsidy
Q
2
Q
1
MSC
D
= MPB
S
= MPC
Figure 8.8 
External benefits and use of a subsidy
P
2
P
1
P
3
0
Price
Quantity
Q
1
S
1
= MPC
Q
2
S
2
= MPC + subsidy
D
2
= MSB = MPB + MEB
D
1
= MPB
G
F
H
A child in Africa receiving a cholera inoculation