Economics 9708/31 — May/June 2020

Background Concept

An externality is a cost or benefit arising from an economic transaction that affects third parties who are not directly involved in that transaction. When the effect is a benefit, it is a positive externality. Consumption activities can generate positive externalities if they benefit others beyond the consumer. For example, getting a vaccination reduces the risk of infection for the vaccinated person (private benefit) and also reduces the spread of the disease in the wider community (external benefit). The social benefit equals private benefit plus external benefit. A positive externality of consumption exists when social benefit is greater than private benefit.

Understanding the Question

The question asks why the vaccination programme would be described as a positive externality. You need to select the option that correctly identifies the external benefit. The scenario is a medical team vaccinating children to prevent an outbreak – clearly there is a benefit to the community beyond the vaccinated children.

Approach

Evaluate each option against the definition of a positive externality:

• Option A points to an additional benefit gained because the disease stops spreading – this is the third-party benefit characteristic of a positive externality.
• Option B says any kind of medical help will improve the condition of the children – this is too broad; not every medical intervention creates an externality, and the question is specific to vaccination.
• Option C says no action would be taken unless the medical team intervened – this is about necessity, not about external benefits.
• Option D says social benefits are less than social costs – this would imply a net social cost, which does not describe a positive externality (a positive externality occurs when social benefits exceed private benefits, not when they are less than social costs).

Step-by-Step Reasoning

1. Identify the key feature of a positive externality: third parties receive a benefit they do not pay for.
2. In the vaccination scenario, the vaccinated child is protected (first party). The medical team and the camp organisers are the second party (providing the service). The other camp residents are third parties – they benefit from a lower risk of outbreak even if they themselves are not vaccinated.
3. Option A states: 'Additional benefit might be gained as the disease no longer spreads.' This directly captures the external benefit – the reduced spread of disease to others is the additional benefit. This matches the definition of positive externality.
4. Option B is incorrect because 'any kind of medical help' does not guarantee a third-party benefit; medical help could be purely private (e.g., treating a treatable injury). Also, the question asks specifically about this vaccination, not all medical help.
5. Option C is irrelevant to the concept of externality; it discusses intervention necessity, not benefit to third parties.
6. Option D is incorrect because social benefits of vaccination far exceed social costs (vaccines are cheap, disease outbreaks are costly). More fundamentally, for a positive externality we require social benefit > private benefit, not social benefit < social cost. The statement D describes a negative externality or inefficient outcome.

Key Takeaways

• A positive externality is defined by an unpaid benefit to third parties.
• Look for the external effect – the benefit that spills over to others beyond the direct consumer.
• In MCQ options, eliminate those that confuse private benefit with external benefit, or that describe necessity, cost, or general statements.

Common Mistakes

• Choosing an option that seems plausible but does not capture the externality element (e.g., B).
• Confusing a positive externality with the idea that 'something good is happening' – it's specifically the side-effect on others.
• Thinking that any intervention by a third party (like a medical team) itself constitutes an externality; the externality comes from the activity, not the existence of the team.

Things to Be Careful About

• Read the exact words of the question and options. 'Additional benefit' is a direct hint to the external benefit.
• Remember that externalities can be positive or negative; this one is positive because the spillover is a beneficial reduction in disease transmission.
• Do not overthink – the simplest accurate answer is often correct.