Positive Externalities of Production and Consumption
Market Failure: Externalities and Common Pool Resources
AO2·AO4·Diagram required
Syllabus requirement
Situations where third parties benefit from market activity without paying, leading to under-provision of merit goods.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Diagrams showing market failure due to positive externalities (of production and consumption), with MSB > MPB or MSC > MPC and welfare loss triangle.
Summary
This topic explains positive externalities in production and consumption and how government policies — especially subsidies and direct provision — attempt to correct the market failure. It shows how a producer subsidy shifts supply outward (MPC to MSC), lowers consumer price, raises output toward the social optimum, but can create deadweight loss and has practical limitations. Direct government provision increases access to merit and public goods but can cause inefficiency, opportunity costs and allocation problems.
