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You are expected to explain/analyze (AO2) the positive externalities of consumption/production and its welfare loss (SL+HL), draw (AO4) the postive externalities diagrams (SL+HL), and calculate (AO4) the size of the welfare loss from the diagram (HL)
Positive Externalities and Merit Goods (AO2)
Positive Externalities and Merit Goods (AO2)
Positive Externalities are benefits caused by producers or consumers but passed on to a third party. Here are 2 examples:
Goods and services that cause positive externalities when consumed are called merit goods. Examples include:
The education system
The healthcare system
Vaccinations
Healthy food
Notice one thing about these examples? Too little of them are produced or consumed!
This is what the market failure is when it comes to merit goods: There is an underprovision or underconsumption of the good. We can see this on the externality diagrams:
Positive Externality Diagrams (AO4):
Positive Externality Diagrams (AO4):
Remembering all the labels on the diagrams and where they go can be tricky, but something that works is to draw the diagrams over and over again until you can do it without looking it up (I'm serious)
Welfare Loss Calculations (AO4) (HL Only)
Welfare Loss Calculations (AO4) (HL Only)
As an HL student, you are expected to be able to calculate the size of the welfare loss. Doing this is quite simple, as it's just calculating the area of that blue triangle. Below is a step-by-step example, in case you're in AISL:
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