External Benefits of Consumption (Edexcel IGCSE Economics)
Positive Externalities of Consumption
Spec point —
1.1.6c
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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
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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
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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
| Product / Industry | Private Benefit | External Benefit |
|---|---|---|
| Honey production | - Satisfaction from keeping bees - Revenue from sale of honey | - Pollination of surrounding flora / fruit orchards |
| Measles vaccination | - Protection from a nasty disease | - The protected individual is now unable to pass measles on to their friends - the friends are safe from catching measles |
The Impact of External Benefits & Government Intervention
Spec point —
1.1.6d
- 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
| External Benefits | Possible Stakeholders | Government Intervention |
|---|---|---|
| - Healthy people require less state medical care - It relieves stress and increases productivity in the workplace - Older people maintain independence for longer and are less of a burden on family/state - Improves memory and concentration, which raises productivity in the workplace | - Leisure Centre Owners - Consumers (Members) - Community members who live nearby - Government - Local health services - Employers - Economy | - Increase provision by building new centres - Subsidise existing provision - Advertise to raise awareness of benefits - Any intervention has both advantages and disadvantages e.g. subsidising Leisure Centre memberships may reduce funding available for libraries |
Exam Hint Although this page focuses on external benefits, you need to recognise that goods or services provided by the government carry an opportunity cost. There is also often a time lag before the benefits are seen.
You will often be asked to define, give examples, and provide a formula for external benefits.
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