Positive Externalities AS economics revision presentation on positive externalities and market failure. Positive externalities exist when third parties benefit from the spill-over effects of production/consumption

Positive Externalities Positive externalities create external benefits to 3 rd 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

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?

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

Social Returns: The External Benefits from Education 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

Problems of measurement Many positive externalities are intangible –Human relationships –Cultural awareness Therefore difficult to measure Normative values are involved Some external benefits can be measured –Productivity effects –Employment effects –Health outcomes

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

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

Positive Externalities & Social Welfare Costs Benefits Output (Q) PB PC = SC SB QpQs

Positive Externalities & Social Welfare Costs Benefits Output (Q) PB PC = SC SB QpQs

Positive Externalities & Social Welfare Costs Benefits Output (Q) PB PC = SC SB QpQs External Benefit

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

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

Positive Externalities: 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

Free entry to museums – the arguments for and against Is there a strong economic case for the government subsidising free entry to London’s major museums?

Economic arguments Case for subsidy / free entry Counter arguments

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

Economic arguments Case for subsidy / free entry Positive externalities Informational benefits More visitors – higher non- entrance fee revenues Boost to British tourism Counter arguments Equity arguments – why just London? 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