Positive Externality — Consumption
Diagram showing MSB above MPB, with the free market underconsumption at Qp and the socially optimal quantity at Qs (MSB = MSC), illustrating the welfare gain from a subsidy.
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This diagram illustrates market failure where consuming a good creates positive spillover effects for third parties, such as education or healthcare. The free market produces at Qm where marginal private benefit equals marginal social cost, but the socially optimal output is higher at Qs where marginal social benefit equals marginal social cost. The vertical gap between MSB and MPB represents the external benefit per unit consumed. Government intervention is needed to increase consumption to the socially optimal level.
Key points
- MSB lies above MPB because external benefits exist - third parties gain from the consumption
- Free market equilibrium (Qm, Pm) results in underconsumption compared to social optimum (Qs, Ps)
- The welfare loss triangle shows the deadweight loss to society from underconsumption
- Government can use subsidies, provision, or regulation to increase consumption to Qs
- Examples include education, healthcare, vaccinations - goods where individual consumption benefits others
Exam tip
Always clearly label the welfare loss triangle between MSB and MPB curves to show the deadweight loss from underconsumption. Examiners are impressed when students explain that the free market fails because consumers only consider private benefits, ignoring the positive spillover effects on society.
Common mistakes
Students often confuse this with negative externality diagrams and incorrectly show MSB below MPB instead of above. They also frequently fail to identify that the problem is underconsumption rather than overconsumption.
Exam board notes
All major exam boards treat this diagram identically, though OCR sometimes emphasises the calculation of welfare loss areas more heavily in their mark schemes.
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