Figure 11-3The graph in Figure 11-3 reveals the same result as the previous one, but for a different reason. In this scenario, the
government has decided to levy a tax on a firm’s output. This drives up the cost of production and decreases output
while increasing price. The government can use this money to clean up the negative externality.
Positive Externalities or Spillover Benefits
Spillover benefitsare benefits received by those who did not pay for them. The demand curve is located below the mar-
ginal social benefit. The demand curve illustrates the utility of all who paid the costs to receive the benefit from the
good. However, it does not take into account the utility and benefit received by those who did notpay for the good.
Consider this example: Andy goes to the doctor to receive a vaccine for various viruses. Andy pays the cost for this ben-
efit; however, people with whom he comes into contact also benefit by his decision because they are less likely to catch
the viruses for which he was vaccinated. Andy has created a positive externality as a result of his decision.
When illustrating a positive externality on a graph, you must remember that the demand curve is located to the left of
the marginal benefit curve. Figure 11-4 illustrates a positive externality; in the figure, MSB stands for marginal social
benefitwhich is the additional positive social effects on the economy.
Figure 11-4QSB QuantityPriceQPPSBMSBDemandQ QuantityPriceQTPPTS (private cost)DS (after government taxation)Part III: Microeconomics