Question

Given a scenario, explain, both verbally and graphically, how the allocation of resources is impacted by external benefits (positive externalities).

Answer 1

Due to positive externalities, socially optimum level of production is more than private efficient level because production by private players tends to benefits society and raise raise socially optimum level. Society can use more of their resources to raise output level. As economy is using less resources than efficient level, there occurs deadweight loss in society. Government can provide subsidies to private producers to raise their output level or use more of the resources such that output level is socially optimum.