1. Positive Externalities of Production Where the production of goods has spill over benefits, the producers MC curve does not fully take account of the cost savings to the other producers advantaged. ECO 13/4/3

2. Positive Externalities of Production An example could be the planting of forests in an arid area helps to create a micro climate more suitable for other farming operations. The improved climate cuts down the need for extra irrigation lowering their costs.

3. Positive Externalities of Production This causes a loss of efficiency as the private equilibrium results in under- production Under production results in output being produced where the social costs are lower than the social benefits, so some welfare gain is being forgone, causing dead weight loss.

4. Spill over benefits Positive Externalities of Production MC MB Pm Qm The forestry producer considers their private cost and benefit and will produce Qm where MC=MB at a price of Pm. MSC The spill over benefits result in a lower social cost to producers giving us the Marginal Social Cost curve MSC. Ps Qs When all the benefits are taken in to account the Socially Desirable outcome would be more production at Qs and a lower price to reflect the true costs Ps

5. Positive Externalities of Production MC MB Pm Qm At Qm the MSC<MB which means benefits exceed the costs of production. The effieicency gain not utilised results in a Dead Weight Loss for the economy. This is shown as the area of benefit exceeding cost, representing welfare forgone Ps Qs MSC MSC < MB DWL

6. Positive Externalities of Production MC MB Pm Qm If we were to produce at Qs rather than Qm, there would be a gain in spill-over benefits 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 Ps Qs MSC The move to this level of quantity involves private marginal costs exceeding private marginal benefit DWL

7. Positive Externalities of Production In order to achieve the socially desirable output and price. The government could subsidise (=spillover benefit at Qs) the production creating the spillover benefits. This will result in a dual price supply shown with the curve MC’ MC MB Pm Qm MSC Required subsidy Ps Qs =MC’

8. Positive Externalities of Production MC MB Pm Qm The subsidy results in an increase in spill-over benefits Overall, the increased gain in spill-over benefits is greater than the marginal loss, giving an efficiency gain, eliminating the Dead Weight Loss Ps Qs MSC The move to this level of quantity involves private marginal costs exceeding private marginal benefit Efficiency gain

9. External Benefit Positive Externalities of Production Internalising the Externality By subsidising the costs of the firm increase to reflect the external benefits, these spill over benefits have reduced internal costs. Internal: Firms Private Costs

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