Externality takes place when action of one agent exerts direct impact on welfare of other agent, and this impact is not transferred by market prices. When there are externalities in the market, the social marginal cost is not equal to private marginal cost. Positive externalities compel market to produce less than the socially desirable quantity (Gans, King & Mankiw, 2011). Positive externalities are present in the economy when marginal social benefits are greater than marginal private benefits (Cypher, 2014). There are, however, several examples of economic activities that pave the way to production of positive externalities such as:
Provision of Education
Industrial training by organizations or firms
Technology Spillover
Positive externality results from provision of education as individuals who are educated are more skilled and productive workers. Educated people are, however, more informed and contribute to bringing improvement in output or productivity of the economy. The parties that are positively influenced by positive externalities are government, unemployed people, and educated people (get higher pay). Skilled people get higher pay for their work, unemployed people get job as education leads to improved employability, and reduction of risk of structural unemployment. In this way, they also become capable of earning. Increase in expected earnings, however, increase tax revenues of the government.
Industrial training by the firms helps in reduction of cost that is faced by other firms, and it also exerts essential influence on productivity of labor. Additionally, improvement in productivity paves the way to bringing improvement in standard of living in the economy. Provision of training to structurally unemployed workers makes them capable of finding work. However, stakeholders are structurally unemployed people, people living in the society, and government. Unemployed workers manage to find the work, which helps in ensuring benefits for other people that are living in the society, such as for family members of workers. Moreover, government is benefitted as it has to pay less unemployment benefits, and become able to collect more tax revenue.
Furthermore, technology spillover is also a positive externality (Mankiw, 2014). This externality, however, exists when design and innovation of the firm is beneficial not only for the firm alone, but is also advantageous for the whole society. For example, when a firm or a company builds robot, it is expected that the company will focus on discovering new and innovative designs, which is beneficial not only for the firm but also for the society as a whole when it makes its entry into the pool of technological knowledge of the society.
In order to control and eliminate positive externalities, government can play its role, as it can internalize these externalities by providing subsidies. Subsidies help in ensuring social efficiency. They make consumers end up by ensuring payment of socially efficient price that comprises of external benefits. For example, increasing student grants and providing low cost loans to them in order to encourage them to get education. However, government can subsidize robot production by subsidizing form for production of each robot, which will shift the supply curve downwards by the amount of subsidy. However, this shift leads to bring an improvement in robots’ equilibrium quantity. In order to ensure that equilibrium of market is equal to social optimum, it is necessary that subsidy is equal to the value of technology spillover. Subsidies play a useful role in changing preferences, and encourage firms for the development of more products having positive externalities (Mankiw). Thus, subsidies help in shifting the supply curve, decreasing the production cost, and increasing supply in order to attain optimal quantity, which in turn increases consumption.
References
Cypher, J. (2014). The Process of Economic Development. Routledge, New York
Gans, J., King, S., & Mankiw, N.G. (2011). Principles of Microeconomics. Nelson Education Limited, Canada
Mankiw, N.G. (2014). Principles of Economics. Nelson Education Limited, Canada
