Positive Consumption - Education Example

MPB < MSB

In this example, education is used as an example of a positive consumption externality. Education has a positive effect when consumed, since all firms that later hire that worker will have a more skilled worker that is more productive and efficient. The MPB of education is lower than the MSB since more education results in higher expected wages, but does not account for the increased productivity gained by the firms that you work for. This is why MSB is higher than MPB. MSB is like a demand curve, and we want consumers to demand education more, as it provides a greater benefit than they receive.

When there is a positive consumption externality, we want to increase demand to maximise social welfare.

The filled in area represents the welfare loss because of the market failure.