Question

Using Figure 12.9 as a guide, discuss external benefits. What is the “harm” if the production or consumption of a particular good generates a hidden social benefit? How can these spillover advantages impact the pricing system or allocation of resources?

FIGURE 12.9 A Good in which the Production or Consumption Generates External Benefits D, if external benefit could be captured Q, Q This model represents a good that the production or consumption generates external benefits. IF (intentionally capitalized) the total of these external benefits could be realized by the market, the demand would rise, increasing the price and the quantity supplied. Because the benefits are external this "IF" cannot happen.

Answer 1

external benefits are basically the advantages from the production of a particular good or service that are not restricted to the market participants but are extended to non market participants as well. Take the case of vaccination. as more and more people are vaccinated they are not only benefiting themselves but people around them because it reduces the probability of an epidemic. Similarly education has external benefits because those who are educated are not only benefiting themselves but are benefiting the society as well when they spread the education they receive to others

If there is an external benefit which remains hidden and is not internalized, then it results in under production of that activity in the market price is also lower. There is a misallocation of resources as well because socially efficient outcome has a higher quantity and a higher price which implies that there is currently a dead weight loss.