Positive Production - Training in transferable skills Example

MSC < MPC

In this example, training in transferable skills is used as an example of a positive production externality. Training in transferable skills is done by individual firms, but increases the skill of the worker. This means that there is a gain for all firms in future who hire the same worker. If all firms are training their staff, then all firms will gain from other firms' training of workers. The private cost of training is more than social cost (MPC > MSC), this means that firms do not train workers as much as they should, because it costs them more than it costs society. The MSC curve is to the right of the MPC curve because they are like supply curves, where the costs of production are lower for society compared to the private cost, so MSC is to the right of MPC.

When there is a positive production externality, we want to increase production of the good in order to maximise societal welfare.