Figure 5.8 Underproduction with a Positive Externality
Turning to positive externalities, we can think of the private good generating benefits that cannot be captured by the producer. For example, f s that plant future harvesting may provide a scenic benefit for which they receive no compensation. In Figure 5.8 we illustrate the demand schedule for the private good harvest) as D, which also gives the marginal private benefits (MPB) At each forest size, however, the social marginal benefit schedule would equal the market demand plus the amounts that viewers would be willing to pay to have the forest expanded by another unit. MSB labels the social marginal benefit schedule which includes both the private and external marginal benefits. Market equilibri um results at output level Qe, where the market demand schedule and the supply schedule intersect. But if output were raised to Qo, consumer surplus would in crease by area aca (resulting from increased consumption from Qe to Qo) minus are PocbPe (due to the price rise from Pe to Po), and producer surplus would increase b area PoabPe. The net increase in social surplus, therefore, would be area abd. Again we see that in the case of an externality, we can find a reallocation that increases s cial surplus and thereby offers the possibility of an increase in efficiency.