A positive externality is a _________________ to a _____________ party to an economic transaction outside the _________________ mechanism. It can be calculated as the difference between ______________ benefit and the _________________ benefit. _____________ benefit can be defined as the benefits to all of society. _____________ benefit can be defined as the benefits to the individuals involved in the economic transaction. 2. Plotting a positive externality Leo has recently rebuilt and redesigned his garden. It results in all his neighbours benefiting from the lovely views when he invites them to his barbecues. 2.1 Plot the following data to illustrate this situation. (Hint: the horizontal axis should be Number of Barbeques; the vertical is Cost/Benefit s) Number of Barbecues MPC=MSC MPB MSB 1 60 156 188 2 76 140 172 3 92 124 156 4 108 108 140 5 124 92 124 6 140 76 108 2.2 At the market-determined level of output, how many BBQs would Leo host? ______________________________ 2.3 At the socially optimal level of output, how many barbecues would Leo host? _______________________________ 2.4 How large is the external benefit associated with each of Leo's barbecues? _________________________ 2.5 Shade in the welfare loss resulting from the under-consumption. 2.6 The government would wish to encourage goods that produce a positive externality. These are often underconsumed because individuals do not recognise the external benefit they produce. This is due to an ___________________ ____________________. 2.7 The government can try to internalise the external benefit by bringing it back into the market mechanism. Outline two ways this could be achieved: ______________________________________________________________________________________ ______________________________________________________________________________________ ______________________________________________________________________________________ ______________________________________________________________________________________ However both these policies are expensive and there are no guarantees that they will actually work. 3. Explain why: 3.1 Society can benefit if positive externalities can be brought within the market mechanism. ______________________________________________________________________________________ ______________________________________________________________________________________ 3.2 Only government is in a strong position to bring positive externalities within the market mechanism.