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Positive production externalities
Positive production externalities are benefits to third parties and are created by producers of goods and services.
If a forestry company plants new woodlands, there is a benefit not only to the company itself but also to the world through a reduction of CO2 in the atmosphere (forests are a carbon sink). The marginal social cost of providing timber, therefore, is less than the marginal private cost.
It is implied that the government should provide a subsidy to the firm equal to the external benefit.
Allocative efficiency is now being achieved.
Economics notes on
Government intervention and positive production externalities
Perfect for A level, GCSEs and O levels!
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