There are many occasions when the production and/or consumption of a good or a service creates external benefits which boost social welfare.

1. Positive Externalities
AS Economics

2. Positive Externalities
• Positive externalities create external benefits to 3rd parties
• Activities said to generate positive externalities include:
– Social returns from investment in education & training
– Positive benefits from health care and medical research
– Benefits from vaccination and immunization programmes
– Provision of flood protection systems & fire safety equipment
– Restored historic buildings and monuments
– External benefits from usage of public libraries and museums
– Externalities from inward migration of population
• Population diversity
• More innovation

3. Social benefits defined
• Social benefits refer to the total benefit to society
from a good ie the benefit to individuals and any
beneficial unintended spill over effects on third
parties.
• Social benefits are found by adding together the
private and external benefits of a given economic
activity.

4. Social benefits
Private
Benefits
+ External benefits = Social
Benefits
Benefits to
individual
consumers or
firms of their
economic
activity
Benefits to others of
individual
consumers or firms
economic activity
Total benefits
to society of a
given economic
activity
Benefits to
first parties -
individuals
Benefits to third
parties - others
Total benefits
to society –
everyone

5. Positive Externalities
Flood protection schemes,
immunization and galleries and
museums all provide external
benefits
Left to itself, would the free-
market fail to provide sufficient
products that yield positive
externalities?

6. Positive Externalities – the key points
• With positive externalities the social benefit >
private benefit
• Individual consumers may under-value and under-
consume these goods and services
• The under-valuation of the private benefit of
consuming a product may be as a result of
imperfect information
• Under consumption / under provision leads to
market failure

7. Social Benefits from Education & Training
• Improved social skills and awareness of citizenship
• Greater long-term contribution to the economy
– Higher productivity
– Improved employability
– Impact on competitiveness from an improvement in human
capital
– All of the above should help to contribute to a higher trend rate
of growth
• Higher expected earnings might provide increased tax
revenues for the government
• Diffusion of knowledge and understanding

8. Vaccinations
• Outline some of the private benefits to people
from a vaccination programme (for example a
programme run in a developing country)
• Outline some of the possible external benefits
from this programme
– Short term external benefits
– Longer-term external benefits

9. Externalities: Problems of measurement
• Many positive externalities are intangible
– Human relationships
– Cultural awareness
• Normative values are involved
• However - some external benefits can be
measured
– Productivity effects
– Employment effects
– Health outcomes

10. Positive Externalities & Social Welfare
Costs
Benefits
Output (Q)
Private Benefit
PC = SC
Qp

11. Positive Externalities & Social Welfare
Costs
Benefits
Output (Q)
PB
PC = SC
SB
Qp
Assume consumption of a good generates positive externalities

12. Positive Externalities & Social Welfare
Costs
Benefits
Output (Q)
PB
PC = SC
SB
Qp Qs

13. Positive Externalities & Social Welfare
Costs
Benefits
Output (Q)
PB
PC = SC
SB
Qp Qs

14. Positive Externalities & Social Welfare
Costs
Benefits
Output (Q)
PB
PC = SC
SB
Qp Qs
External Benefit

15. Positive Externalities & Social Welfare
Costs
Benefits
Output (Q)
PB
PC = SC
SB
Qp Qs
External Benefit
Under-provided

16. Positive Externalities & Social Welfare
Costs
Benefits
Output (Q)
PB
PC = SC
SB
Qp Qs
External Benefit
Loss of economic welfare

17. Positive externalities – correcting for market
failure
• Positive externalities cause mean social benefits
exceed private costs resulting in underproduction,
• There is a case for some form of government
intervention designed to increase production and
consumption of activities that lead to positive
externalities.
• The issue is which form of intervention is most
efficient and most equitable in achieving the
desired social optimum level of production.

18. Encouraging supply and consumption

19. Encouraging Consumption / Provision
• Government subsidy
– Designed to reduce the private cost of consumption or reduce
the cost of supply
– Lower costs should cause an expansion of demand
• Student grants and low-cost loans?
• Subsidies to fund free entrance to museums and other
heritage sites
• Command and Control techniques
• Minimum school leaving age
• Compulsory health immunisation programmes
• Improved information flows to potential consumers
• Health awareness programmes

20. Free entry to museums – the arguments
Is there a strong economic case
for the government subsidising
free entry to our major museums?

21. Economic arguments
• Case for subsidy /
free entry
• Counter arguments

22. Economic arguments
• Case for subsidy / free
entry
• Positive externalities
• Informational benefits
• More visitors – higher non-
entrance fee revenues
• Boost to British tourism

23. Counter arguments
• Which museums should be free?
• Risk of dependency on the subsidy?
• Do people value things as much when they are free?
• Diminishing returns?
• Low Ped – requires expensive subsidy to boost numbers
• Opportunity cost of the money used