Question

According to a local politician, there is no need for government intervention when positive externalities are present because no one is being harmed. Comment about this opinion from an economic point of perspective. Use appropriate diagram(s) to illustrate and explain your answer.

Answer 1

When the action of two entities effects a third party , it is known as externality . Externality maybe negative or positive . Education is such a good that generates positive externalities . Because a person who pay and receives education is not the only person who is benefitted . There is a spill over effect . This educated person educates or spreads awareness in society or becomes a responsible citizen or tax payer .

Where positive externalities exist, the good or service may be under-consumed or under-provided . This is because the free market may fail to value them correctly or take them into account when pricing the product , the externality is not internalized in free market setup . If there are external benefits the market delivers an output ( market equilibrium ) below the quantity that maximises social welfare . Private organizations are profit maximizers , they do not include social welfare in production . So the government has to intervene to inrease consumption in order to maximize social welfare . If government subsidizes education then education becomes cheaper and more is consumed , social welfare increases .

No one is being harmed but there will be market failure and inefficiency if government does not intervene . So to maximize social welfare , government has to intervene .