These occur when the production of a good creates external benefits that are beneficial to third parties.
Correcting Positive Production Externalities: Direct Government Provision
This involves the govt intervening into the economy and acting as a producer, the supply shifts right. For example, the govt could pay to train workers using tax revenue.
Correcting Positive Production Externalities: Subsidies
The govt may provide a subsidy to the firm per unit of the good produced that is equal to the external benefit causing the MPC to shift right till it overlaps with the MSC curve.
Positive Consumption Externalities
External benefits are created by consumers.
Goods that are held to be desirable for consumers but are underprovided by the market.
3 Reasons for the Underprovision of Merit Goods
1. The good has positive externalities. 2. Low levels of income and poverty so some consumers may want to buy those goods but cannot afford them. 3. Consumer Ignorance- consumers may be unaware of the benefits of consuming particular goods or services and as a result they underconsume them.
A subsidy to the producer of the good shifts the supple curve right.
Advantages of Government Provision & Subsidies
It is effective at increasing the quantity of the good produced and consumed. It is also effective at lowering the price of the good to the consumers.
Disadvantages of Government Provision & Subsidies
It involves using govt funds (Opp Cost) It is difficult to asses the value of external benefits. Highly political in nature and the govt. may sometimes make choices on political rather than economic criteria.