Positive Externalities of Consumption Where the consumption of goods has spill over benefits, the consumers MB curve does not fully take account of the total benefits to society. ECO 13/4/3

Positive Externalities of Consumption An example could be the consumption of child vaccines. As well as protecting child being vaccinated, it reduces the amount of diseases that other children may contract.

Positive Externalities of Consumption The family considers their private cost and benefit and will consume Qm where MC=MB at a price of Pm. The spill over benefits result in increasing total benefits giving us the higher Marginal Social Benefit curve MSB. Optimal consumption occurs at Qs The market failure is under consumption of vaccines as the spill-over benefits are not considered by the private consumers. MC MSB MB Qs Qm Pm Under consumption Spill-over benefits

Loss of Allocative Efficiency QmQs At Qs, we are forgoing further consumption of the product where the Marginal Social Benefit is greater than the Marginal cost to produce it. MSB>MC This represents a loss of potential gain to society, a Dead Weight Loss DWL

Loss of Allocative Efficiency QmQs If we were to consume at Qs rather than Qm there would be a gain in spill- over benefits The move to this level of quantity involves private marginal costs exceeding private marginal benefit Overall, the increased gain in spill-over benefits is greater than the marginal loss, so is a potential efficiency gain not utilised, a Dead Weight Loss MC>MB DWL

Overpriced or under-priced In this situation the socially desirable price is confusing.  We should value vacines more, giving a higher price  We want a lower price to encourage more consumption We focus on Qs, no Ps PS?

Possible Interventions Subsidy Regulations forcing vaccinations Education encouraging vaccinations

Positive Externalities of Consumption In order to achieve the socially desirable output and price the government could subsidise the consumption of vaccines. MC MSB MB QsQm Pm Ps subsidy The size of the subsidy needed is the vertical distance between MB and MSB at Qs. Total cost of subsidy as the rectangle formed by the subsidy and Qs This will reduce the private costs of the consumer resulting in consumption at Qs MC+ sub

Loss of Allocative Efficiency QmQs The subsidy results in a split price shown by MC+sub This results in a gain in spill over benefits Overall, the increased gain in spill-over benefits is greater than the marginal loss, giving an efficiency efficiency gain, eliminating the Dead Weight Loss MC>MB MC+ sub It also causes private costs to exceed private benefits Efficiency gain

External Benefit Positive Externalities of Consumption Internalising the Externality By making the costs of the firm decrease to reflect the external benefits, these spill over benefits have reduced internal costs. Internal: Private Benefits of consumption

Positive Externalities of Consumption To be totally effective, the cost of the subsidy should be borne by the consumers benefiting from the spill over benefits rather than from general taxation. The government could tax these consumers to pay for the subsidy.