External Benefits of Consumption (Edexcel IGCSE Economics)

Positive Externalities of Consumption

• Whenever the consumption of a good or service generates external benefits, it is referred to as a positive externality of consumption

  • External benefit = social benefit - private benefit

• The market is failing due to under-consumption of these goods and services. Only the private benefits are considered by consumers, not the external benefits

  • If external benefits were considered, the quantity of goods and services consumed would increase, and due to the higher demand, they would be sold at a higher price

  • Examples of goods with external benefits include education, healthcare and vaccinations. These all have spillover benefits on third parties

Diagram: External Benefits from Consumption

External benefits from beekeeping, education and vaccinations

• External benefits can be observed from university graduates

  • Educated individuals can obtain higher-skilled jobs, are more productive in the workplace, leading to economic growth

  • This reduces inequality if essential services are free, improving standard of living

Analysing Private and External Benefits

The Impact of External Benefits & Government Intervention

• Analysing external benefits and the government intervention necessary to correct them is best done by considering real world examples

• Analysis should always include the impact on stakeholders, including producers, consumers, government, and relevant third parties

• In the UK, leisure centres are low cost gymnasiums provided by the government for the benefit of the population

External Benefits and Government Intervention - Leisure Centres