Answer to Question #187759 in Economics for happybdaygibberish

Question

So I need to draw a positive externalities graph. For context it is about R&D for vaccination programme where positive externalities (inc freeriding) = lack of incentive to research/invest etc.

However I need to draw a COST-QUANTITY graph (not a Price Quantity one which is all I know). For reference like this - https://www.core-econ.org/the-economy/book/images/web/figure-12-01-d.jpg (this is from the CORE econ textbook and is a negative externalities version.

I am unsure how to adapt this graph to show positive externalities where we want to increase not decrease Q, and how to show the effect of any gov. intervention on the graph (like subsidies to increase R&D incentivisation).

Any help to point me in the right direction greatly appreciated :)

Answer 1

When a positive externality exists in an unregulated market, consumers pay a lower price and consume less quantity than the socially efficient outcome. This can be seen on the graph. Consumers pay price P' and consume quantity Q', but at that quantity society would have them pay more. At P' Q' the marginal benefit to society is much higher than marginal cost, resulting in a deadweight welfare loss. The socially efficient outcome is to pay price P* and consume quantity Q*. At this price and quantity the marginal benefit to society is equal to the marginal cost.