what time is it, my eyeballs are melting. (Chapter 6 Q&A)

19/10/2012 § Leave a comment

#2 A two parter question. Total: 25 marks, as always.

(a) What are positive externalities and how do they arise? Illustrate your answer with examples.

Positive externalities are the positive spillover effects that create benefits for the third parties (someone other than the consumer and the producer). There are two types of positive externalities – the positive externality of production and the positive externality of consumption. An example of a positive externality of production would be something like an R&D section in a company that can be used for another firm or company to help with their advances in whatever subject. The third party is the other company and they’re receiving the benefits of the product (the service and research done by the R&D department). The ideal example of a positive externality of consumption is education, education, education. There are so many likely advantages in the consumption of education (which is why the government continually encourages the consumption of education). When education is consumed, the students – the consumers – are able to positively affect society in the future. Society is the third party in this picture and a smarter generation (the students who consumed education) will be hugely advantageous for the economy and for society as a whole.

(b) To what extent should governments attempt to influence markets where positive externalities exist?

Governments should try to go all out when it comes to influencing markets where positive externalities exist. The problem about positive externalities is that they are underproduced and/or overpriced. Governments can stick their noses into these situations (with good intentions) by providing subsidies, publicly promoting and advertising the advantages and benefits of consuming certain goods (health foods, education, practice of environmentally friendly behavior, etc.), and making some legal changes that will encourage the use of goods with positive externalities. They should do this because, in the long-run, especially when we’re talking about education, society can only benefit from the spillovers of positive externalities.

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