Download Positive Externalities Summary and Teaching Tips

Positive Externalities Summary and Teaching Tips
The Externalities module is divided into two sections: positive externalities and negative
externalities. The positive externalities section is designed to familiarize students with
the concept of a positive externality and with the manner in which the existence of such
an externality can affect the workings of what otherwise would be an ordinary market.
The existence of the positive externality also allows the student to see how market
structures that would be otherwise be optimal, become sub-optimal in the presence of an
externality.
The particular application used in this section of the module is the development,
production, and distribution of a flu vaccine. This applicatioin provides one of the
clearest examples of a positive externality.
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The student begins by observing the results of having the vaccine created and sold
by a profit maximizing monopoly firm. As usual in SimEcon® the results are
presented in a numerical table and in graphical form. The student observes the
number of vaccinations that result, the firm’s marginal cost, the price of a flu shot,
and social benefits (total and marginal).
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The student then has the opportunity to change the cost of developing a viable
vaccine. Most instructors will probably prefer to use assignments that, at least
initially, leave this at its default value. However, changes in the value can be
used to reinforce the lesson that the presence of such a cost affects the ability of a
competitive market to create and sell a vaccine, as well as the profitability of a
monopolist engaged in doing so.
•
Having set (or left) the cost of development, the student must choose a structure
for this market -- either perfect competition or monopoly. Assignments that
compare results between market structures are useful in clarifying the importance
of the externality, the degree to which the externality causes less than optimal
production (absent certain government interventions), and the way the externality
interacts with market structures to change the degree of sub-optimality that
results.
•
Having decided on the market structure, the student has the opportunity to have
the government subsidize the development cost, or subsidize the (marginal) cost
per shot, or both, or neither. This provides eight possible cases, not counting the
fact that each form of subsidy can be varied in amount, from zero to complete
subsidization. Comparisons of results allow the student to determine the different
types of effects each type of intervention has, and the extent to which such
intervention can be useful or necessary in approaching socially optimal results.
•
Once the subsidization decisions are made, the student gets the results for the
price, the quantity of vaccinations, private and social marginal benefits, marginal
costs, total benefits, and profits. Many of these results are also reported
Positive Externalities
Summary and Teaching Tips
graphically thus allowing an easy comparison of actual results with optimal
results.
Positive Externalities
Summary and Teaching Tips
Positive Externalities Module
Initial Conditions
Choices
• Government Spending
• Social Net Benefits Lost
• # of Flu Shots
• Price of a Flu Shot
• MSB of a Flu Shot
• MPC of a Flu Shot
• Development Cost
• Market Structure
• Subsidy Type
Results of Market
Choices
• Vaccine Price
• Marginal Private Cost
• # Vaccinated
• MSB
• MSC
• Total Profit
• Total Social Net Benefits