A positive externality happens when the production or use of a product or service gives benefits to other people who were not part of the deal, and they do not have to pay for these benefits.
When a positive externality exists, the private benefit to the person is lower than the total benefit to society. This causes the market to produce less of the good than is ideal for society.
Examples:
- Education: A more educated population improves society through better government and less crime.
- Vaccinations: When people get vaccinated, it stops the spread of disease, helping everyone around them.
- Public transport: Using trains or buses reduces traffic congestion for everyone on the road.
- Beekeeping: Bees that make honey also pollinate nearby crops, which helps local farmers grow more food.
Economic Analysis:
Because the Social Marginal Benefit (SMB) is greater than the Private Marginal Benefit (PMB), the market reaches an equilibrium that is lower than the socially optimal output. This results in under-production and a loss of potential welfare for society.
Government Solutions:
Governments often step in to help by:
- Subsidies: Giving money to producers or consumers to lower costs and encourage more production.
- Direct provision: The government provides the service itself, such as free public schooling or healthcare.
- Information campaigns: Teaching people about the benefits of a product to increase demand.