Positive externality in production
In a free market situation,
individual firm takes int
account only its private co
and benefits and not thos
wider society. SMC>PM
PMC>SMC In a free market, a firm will
ignore benefits to third parties and
produces at Q1. However, the socially
efficient level will be at Q2, where
PMB=SMB
Positive externality in consumption EXTERNALITIES
In a free market, we get Q
But at this output, the socia
cost is greater than SMB
efficiency occurs at a lowe
(Q2) where SMB=SM
In a free market situation,
individual firm takes int
account only its private co
and benefits and not thos
wider society. SMC>PM
PMC>SMC In a free market, a firm will
ignore benefits to third parties and
produces at Q1. However, the socially
efficient level will be at Q2, where
PMB=SMB
Positive externality in consumption EXTERNALITIES
In a free market, we get Q
But at this output, the socia
cost is greater than SMB
efficiency occurs at a lowe
(Q2) where SMB=SM
