Q92+-+Micro

92. What is a positive externality? Give an example and illustrate your answer with a diagram.

Positive externality is when the production or consumption of a good or service has an positive effect upon a third party. for example a call center provides high quality training for its employees. This is a cost to the firm. but when the employees leave that call center and go to the other firms, there is a benefit to the other call centers who do not have to spend money on training their new workers. This is a positive externality of production to the new firm. Society has grained from the training give by the initial call center, even though eventually the firm itself doesn't gain from it as the employees might leave. As a result of this the marginal private cost of the firm is greater than the marginal social cost. This is shown in the graph, where the MPC > MSC. Looking at the graph we can see that the call centers producing at an output of Q1 that is below The socially optimum level of Q*. However between Q1 and Q* there is a potential welfare gain shown by the shaded triangle. Thus is output is increased, then welfare will be gained, as for all the units in between Q1-Q*, MPC > MSC.

