Positive Externality — Production

What this diagram shows

This diagram shows a market where production creates positive externalities - benefits that spill over to third parties who aren't directly involved in the transaction. The marginal social cost (MSC) curve lies below the marginal private cost (MPC) curve because society benefits from additional production beyond what the producer receives. Examples include training workers (who gain transferable skills), research and development (creating knowledge spillovers), or renewable energy production (reducing pollution for everyone).

Key points

• MSC < MPC because positive externalities reduce the true cost to society of producing each additional unit
• The free market produces at Q1 where MPC = MPB, but the socially optimal output is Q2 where MSC = MPB
• This creates under-production and under-consumption - a market failure where society would benefit from more output
• The welfare loss triangle represents the potential benefits to society that are lost due to under-production
• Government intervention through subsidies can shift the supply curve right to achieve the socially optimal output level

Exam board notes

All major exam boards treat this diagram identically, though OCR tends to emphasize real-world examples more heavily while AQA focuses more on the welfare analysis.