Positive Externalities in Consumption | A-Level Economics Model Paragraph

Positive Externalities in Consumption

Market failure occurs when there is a misallocation of resources. A bicycle helmet is a merit good, as it causes positive externalities in consumption, shown by the diagram below. Positive externalities occur when there is a cost to the third party from the consumption of the good or service. The third party can be anyone apart from the buyer or the seller. For example, consumers who wear a bicycle helmet would be more safe and this would cause a smaller burden on the NHS which in turn saves taxpayer money. The diagram shows that there is a divergence between marginal social benefit and marginal private benefit. Social benefit = private benefit + external benefit. This means that social benefit is higher than private benefit in the market for helmets as it factors in benefit to the third party. These externalities get ignored in the free market, where MPC=MPB. The socially optimal quantity would be qs where MSC=MSB. Bicycle helmets are under-consumed in the free-market.

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