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Please select private benefits external benefits positive externalities

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Worksheet on Social Benefits

Step 1 - Who benefits from what?

Firms produce goods and services to sell them and get revenue. This revenue is the private benefit to the firm. However, their actions may also lead to external benefits (or positive externalities). These are benefits that others gain from the firm's actions. For example, a company may invest in various energy efficiency projects to save them money. This obviously is a private saving to the firm. However, there is also a external benefit as less electricity has to be generated and emissions of greenhouse gases are reduced.

For each of the examples below, try to identify the private and external benefits from the firm's action.

Will the firm tend to take account of these external benefits in its decisions? Yes / No

On the diagram below the demand curve is based on just the private benefits of consumption. Draw another demand curve that shows both private and external benefits. Try to show the following:-

• the original price and quantity
• the optimum price and quantity for society
• the difference between the actual consumption and the optimum level of consumption

Step 2 - Benefits in practice

There are many examples in practice where firms or local authorities or governments have set up schemes intended to try to encourage these external benefits. Look at the example of Saarbrucken and answer the following questions.

Write a brief summary of how the solar energy system in Saarbrucken worked.

To encourage the scheme the government had to subsidise the installation the solar cells. Show the effect of this on the diagram below.

THE MARKET FOR SOLAR CELLS

What are the external benefits that arise from this scheme?

Go to the UN's Best Practices database to read a case study on Recyling Household Waste in Manila (you need to either view or download the case study as a Word document).

Write a brief summary of how the waste management scheme in Manila worked.

Fill in the external benefits that you would expect from the scheme:

Would these benefits have arisen if the management of waste had been left to the free market?

Yes / No

What can the government do to ensure that these external benefits occur? What policies are available to them to ensure that they are encouraged?

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