2. Positive Externality Beneficial effects that are enjoyed by a third party when a good or service is produced or consumed Example: firm offering advanced driver training for their employees (to increase private benefit, and also have a spillover effect for society in improving safety on the roads.)
3. Positive Externality of Consumption Positive externality MSC = MPC Price Figure 1: Positive Externalities of consumption Welfare gain P1 P2 MSB MPB 0 Q1 Q2 Quantity
4. Positive Externality of Production MPC Positive externality Price MSC Figure 1: Positive Externalities of production P1 Welfare gain P2 MSB = MPB 0 Q1 Q2 Quantity
5. Negative Externalities Bad effects that are suffered by a third party when a good or service is produced or consumed. Example: pollution, the effects of second-hand smoking.
6. Negative Externality of Consumption Negative externality MSC = MPC Price Figure 1: Negative Externalities of consumption Welfare loss P2 P1 MPB MSB 0 Q2 Q1 Quantity
7. Negative Externality of Production MSC Negative externality Price MPC Figure 1: Negative Externalities of production P2 Welfare loss P1 MSB = MPB 0 Q2 Q1 Quantity
8. Public Goods Goods or services that would not be provided at all by the market. Have the characteristics of non-rivalry and non-diminish ability Example: flood barriers
9. Merit Goods Goods or services considered as beneficial for people and that would be under-provided by the market and so under-consumed. Example: education and health care
10. Demerit Goods Goods or services considered to be harmful to people and that would be over-provided by he market and so over-consumed. Example: cigarettes and alcohol
