Positive consumption externalities

Positive consumption externalities occur when there is a positive externality created by the consumption of certain goods.

Examples include consumption of education and health care. Both these will lead to more productive workforce and hence high rate of economic growth for the society.


As the diagram illustrates, the MSB lies above the MPB and the difference between the two consists of positive externality. The socially optimal level is where MSB=MSC i.e Q*, however, due to under-allocation of resources the output/consumption is at Q1.

Corrective Positive consumption externalities


By giving subsidies to the producers of the good with the positive externality will result in increasing supply and shifting the supply curve downwards. This will lead to MSC curve shifting to MSC+subsidy which means high output/consumption at socially optimal level Q* and at lower prices from P1 to P*.



Through positive advertising government can persuade consumers to increase their consumption and thus lead to a shift of MPB to the right i.e. increase in demand. If the MPB curve shifts enough, it will coincide with MSB and Q* will be produced and consumed.


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