Question 1A. A positive externality is a benefit

Question 1A. A positive externality is a benefit that people who are not directly involved or a third party receives because of an economic transaction. (figure 1) Figure 1 illustrates the shift upwards of the D = MPB curve because of a positive externality which creates a welfare gian which is visible in the gray shaded triangle for the third parties.These third parties can include and organization, resource or individual who is not directly affected by the economic transaction for example if a neighbour decides to fire proof his house so his house doesn’t burn down you will benefit from his economic transaction because there is a decreased chance that in case of a fire, the fire will spread to you. In this case you are also considered as a free rider someone who benefits from positive externalities without paying. These positive externalities arise when less is produced and consumed than the socially optimal levelhis can be seen in figure 1. Consumers are paying P1 and consume Q1. At P1 and Q1 The socially efficient outcome would be to pay P and consume Q. B) To counter or intervene in a market where positive externalities exist a government can do several things(figure 2)(figure 3) Figure 2 shows one way how the government could do to intervene in a market where positive externalities exist by introducing a subsidy which will be given to the consumers For them to consume more of a certain good that has a positive externality. A subsidy will increase the marginal benefit the consumer receives when they consume the good.For example if there is low consumption for carrots even though they bring a lot of health benefits, the government might introduce a subsidy to encourage consumers to buy more carrots   Another way how the government can intervene in a market where positive externalities exist is by introducing line F as seen in Figure 3. Line F ia a price floor which is the minimum price for a good a producer is allowed to introduce for a certain good this minimum price would force the consumers to pay a higher price for a certain good making the consumers pay socially efficient price getting rid of the positive externality. For example the government introduces a price floor for cookies to make the consumers pay the socially efficient amount for the cookies leading to a producer surplus.