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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.

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Government intervention and positive production externalities

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