Positive consumption externalities

Externality
In economics, an externality is the cost or benefit that affects a party who did not
choose to incur that cost or benefit.

Positive Externality
A positive externality is a benefit that is enjoyed by a third-party as a result of an
economic transaction. Third-parties include any individual, organisation, property
owner, or resource that is indirectly affected. While individuals who benefit from
positive externalities without paying are considered to be free-riders, it may be in the
interests of society to encourage free-riders to consume goods which generate
substantial external benefits.
Most merit goods generate positive consumption externalities, which beneficiaries do
not pay for. For example, with healthcare, private treatment for contagious diseases
provides a considerable benefit to others, for which they do not pay. Similarly, with
education, the skills acquired and knowledge learnt at university can benefit the wider
community in many ways.
Unlike the case of negative externalities, which should be discouraged to achieve a
socially efficient allocation of scarce resources, positive externalities should be
encouraged.

Few more examples of Positive Externalities

A positive externality (also called "external benefit" or "external economy") is an
action of a product on consumers that imposes a positive effect on a third party.
Examples of positive externalities (beneficial externality, external benefit, external
economy, or Merit goods) include:

Increased education of individuals can lead to broader society benefits in the

form of greater economic productivity, a lower unemployment rate, greater
household mobility and higher rates of political participation.[14]

A beekeeper keeps the bees for their honey. A side effect or externality
associated with such activity is the pollination of surrounding crops by the bees.
The value generated by the pollination may be more important than the value of
the harvested honey.

An individual buying a product that is interconnected in a network (e.g., a video

cellphone) will increase the usefulness of such phones to other people who have a
video cellphone. When each new user of a product increases the value of the same

product owned by others, the phenomenon is called a network externality or

a network effect. Network externalities often have "tipping points" where,
suddenly, the product reaches general acceptance and near-universal usage.

In an area that does not have a public fire department, homeowners who
purchase private fire protection services provide a positive externality to
neighboring properties, which are less at risk of the protected neighbor's fire
spreading to their (unprotected) house.

An individual receiving a vaccination for a communicable disease not only

decreases the likelihood of the individual's own infection, but also decreases the
likelihood of others becoming infected through contact with the individual.

A foreign firm demonstrates up-to-date technologies to local firms and improves

their productivity.[15]

The existence or management of externalities may give rise to political or legal

conflicts.
Collective solutions or public policies are sometimes implemented to regulate
activities with positive or negative externalities.

Implications:
Voluntary exchange is considered mutually beneficial to both parties involved,
because buyers or sellers would not trade if either thought it detrimental to
themselves. However, a transaction can cause additional effects on third parties. From
the perspective of those affected, these effects may be negative (pollution from a
factory), or positive (honey bees kept for honey that also pollinate neighboring crops).
Neoclassical welfare economics asserts that, under plausible conditions, the existence
of externalities will result in outcomes that are not socially optimal. Those who suffer
from external costs do so involuntarily, whereas those who enjoy external benefits do
so at no cost.
A voluntary exchange may reduce societal welfare if external costs exist. The person
who is affected by the negative externalities in the case of air pollution will see it as
lowered utility: either subjective displeasure or potentially explicit costs, such as
higher medical expenses. The externality may even be seen as a trespass on
their lungs, violating their property rights. Thus, an external cost may pose
an ethical or political problem. Alternatively, it might be seen as a case of poorly
defined property rights, as with, for example, pollution of bodies of water that may
belong to no one (either figuratively, in the case of publicly owned, or literally, in
some countries and/or legal traditions).
On the other hand, a positive externality would increase the utility of third parties at
no cost to them. Since collective societal welfare is improved, but the providers have
no way of monetizing the benefit, less of the good will be produced than would be
optimal for society as a whole. Goods with positive externalities include education
(believed to increase societal productivity and well-being; but controversial, as these

benefits are generally internalized, e.g., in the form of higher wages), public health
initiatives (which may reduce the health risks and costs for third parties for such
things as transmittable diseases) and law enforcement. Positive externalities are often
associated with the free rider problem. For example, individuals who are vaccinated
reduce the risk of contracting the relevant disease for all others around them, and at
high levels of vaccination, society may receive large health and welfare benefits; but
any one individual can refuse vaccination, still avoiding the disease by "free riding" on
the costs borne by others.

Encouraging positive externalities

One role for government is to implement economic policies that promote positive
externalities. There are two general approaches to promoting positive externalities; to
increase the supply of, and demand for, goods, services and resources that generate
external benefits.

Increasing supply
Government grants and subsidies to producers of goods and services that generate
external benefits will reduce costs of production, and encourage more supply. This is a
common remedy to encourage the supply of merit goods such as healthcare,
education, and social housing. Such merit goods can be funded out of central and
local government taxation. Public goods, such as roads, bridges and airports, also
generate considerable positive externalities, and can be built, maintained and fully, or
part, funded out of tax revenue.
Increasing demand
Demand for goods, which generate positive externalities, can be encouraged by
reducing the price paid by consumers. For example, subsidising the tuition fees of
university students will encourage more young people to go to university, which will
generate a positive externality for future generations.
The ultimate encouragement to consume is to make the good completely free at the
point of consumption, such as with freely available hospital treatment for contagious
diseases.
Government can also provide free information to consumers, to compensate for the
information failure that discourages consumption. If individuals are fully informed
about the benefits of consuming goods and services that generate external benefits,
they may develop a better understanding of the product and demand more of it. For
example, public information broadcasts, such as aids awareness programmes, can
reduce ignorance, and encourage the use of condoms.
An additional option is to compel individuals to consume the good or service that
generates the external benefit. For example, if suspected of having a contagious

disease, an individual may be forced into hospital to receive treatment, even against
their will. In terms of education, attendance at school up until the age of 16 is
compulsory, and parents may be fined for encouraging their children to truant.

Net welfare loss

The existence of a positive externality

means that marginal social benefit is
greater than marginal private benefit. For
example, in considering the market for
education, free markets would supply
quantity Q at price P. If the external benefit
is included, the socially efficient output
rises to quantity Q1.

By consuming only quantity Q, marginal social benefit is above marginal social cost,
and more of the good should be consumed. At Q, the marginal social cost is A (Q A),
and the private benefit is also A (Q A) but the marginal social benefit is C (Q C).
Therefore, if only Q is consumed, there is an opportunity cost to society, which is
represented by the area of welfare loss, A, C, B.

Positive production externalities

positive production externality occurs when a third party gains as a result of
production. However, those third parties who benefit cannot be charged, so there is
only an incentive to supply to those who can be charged.
Positive production externalities occur in many situations, most notably with the
construction and operation of infrastructure projects, such as a new airport, or
motorway.

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Refference
http://www.economicsonline.co.uk/Market_failures/Positive_externalitie
s.html
http://en.wikipedia.org/wiki/Externality