Chapter 7, Problem 1QFR

To determine

To explain:

If third party enjoy positive externalities, whether the market is overproducing or underproducing with the help of a supply and demand graph.

Explanation of Solution

When people get profit from positive externalities without paying, these people encourage others to consume goods that produce significant external benefits that can be in the interest of the society. Most merit products produce positive externalities for consumption that are not paid for by beneficiaries. Governments play an important role in implementing economical strategies that encourage positive externalities. Markets strive to under produce positive externalities because the advantages to third parties are not involved in the transaction are generally not noticed and comprehended by such third parties that gain from them. Government's response to this under manufacturing is to subsidize customers, manufacturers or some quantity of both in order to cause society to generate the most effective and optimal manufacturing level. The two approaches to encourage positive economics are increasing the supply of products and services that produces external gains and demand.

It can be explained by the figure below:

  

Figure A

Economics Concept Introduction

Positive externality:

A positive externality is an economic transaction advantage enjoyed by a third party. Third parties include any indirectly affected organization, person, property owner or resource.