Answer to Question #202468 in Microeconomics for vtg

Question

2. Education and Health produce a positive externality (they confer positive external benefit) and this has been used as a justification for having the government subsidize education and health to internalize the externality in South Africa. From a theoretical perspective, is there a case to be made for subsidizing health and welfare in South Africa? Use diagrams to illustrate your answer. There are 5 marks for a clearly labelled diagram

Answer 1

Positive externality extends benefits of a good or a service to a third party. For example in education, an individual gains direct benefits of education then the individual can spread the benefits to others by educating them. The same case apply to health where doctors gain the experience then treat the wider community to promote good health.

The graph of positive externality is as shown below:

Here the social marginal benefit is greater than the private marginal benefit. At Q1 there is under-consumption because social benefits equals social private cost. The marginal cost is less than social marginal benefit. At Q2 there is efficiency because social cost equals social benefit.