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Positive Externalities


Positive externalities exist when the marginal social benefit of production and or consumption exceeds the marginal private benefit i.e. production and/or consumption generate external benefits that may go under-valued by the market.


There are plenty of examples of economic activities that can generate positive externalities:

  • Industrial training by firms: This can reduce the costs faced by other firms and has important effects on labour productivity. A faster growth of productivity allows more output to be produced from a given amount of resources and helps improve living standards throughout the economy, thereby shifting the production possibility frontier outwards.
  • Research into new technologies which can then be disseminated for use by other producers. These technology spill-over effects help to reduce the costs of other producers and cost savings might be passed onto consumers through lower prices
  • Education: A well educated labour force can increase efficiency and produce other important social benefits. Increasingly policy-makers are coming to realise the increased returns that might be exploited from investment in human capital at all ages.
  • Health provision: Improved health provision and health care reduces absenteeism and creates a better quality of life and higher living standards.
  • Employment creation by new small firms
  • Flood protection system and spending on improved fire protection in schools and public arenas
  • Arts and sporting participation and enjoyment derived from historic buildings




E-mail Steve Margetts