Answer to Question #221250 in Macroeconomics for Joe

Question

With a aid of a diagram, explain the difference between positive production externalities and positive consumption externalities

Answer 1

Positive production externalities occur when a firm's production increases the well being of others but the firm is not compensated by those others. The following diagram shows expenditures on oil exploration by any company that have a positive externality because they offer more profitable opportunities for other companies.

Positive consumption externalities occur when individuals consumption increases the well being of others but the individuals is not compensated by those others. In the following diagram the social marginal benefit of consumption is greater than the private margins benefit. For instance if you take a train, it reduces congestion for other travellers.