Dictionary - Positive Production Externality

Definition

The positive effects of economic activities on unrelated third parties that originate during the production process.

Example

An example of a positive production externality could be an orchard placed next to a beehive. The bees will find pollen for producing honey and will at the same time pollinate the plants. Thus, in this situation both the farmer and the beekeeper benefit from each other, even though neither of them has considered the other one's needs in his decision-making.

Relevance

Without any regulatory influence, positive externalities will not be taken into account by the causers. This results in a market failure and an in an undersupply of beneficial behavior, because the suppliers produce less than in an efficient market. Hence, regulations are needed to provide incentives and internalize the externalities.

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