Economics says

that when individuals

follow their own self-interest,

society gets the best possible results, right.

Well usually that's true

but sometimes

individual irrational decisions

can add up to a bad outcome

for society.

An example of this

is positive externalities.

A positive externality

is when a consumer

buys something from a producer

and somehow a third party

is made better off.

For example,

suppose I spend a lot of money

improving the appearance

of my house and yard.

That's a transaction between

me and the garden store,

but was such a beautiful property

on the block property values

for all of my neighbors

rise a little bit.

I benefited from my purchase

but so did they.

The graph for this situation

starts out with our regular

supply and demand model.

Let's look at the market

for gardening supplies.

The producers of those supplies

use society's workers

and raw materials.

We call that

the marginal social cost

which in the case

of a positive externality

is just the same

as a supply curve.

Homeowners buy and use garden supplies

on their own yards

because they receive a benefit.

We call that

the marginal private benefit

which is the same thing as demand.

Think of that

as the benefit to consumers

of their own consumption.

Those homeowners are part of society,

so their private benefit

is part of society's benefit

from nice yards.

But then there's an additional benefit

to all of my neighbors.

The benefit of nice yards

to the entire neighborhood, gardeners,

and their neighbors alike

is called the marginal social benefit.

So how much gardening stuff

is bought and used?

As usual the consumers

compare the dollar value

of their private benefit

represented by demand

with the cost of the goods

represented by supply.

They'll keep buying as long as

the marginal private benefit

exceeds the cost

which brings them here

to the market equilibrium.

But the decisions of those home owners

don't take the benefit

to their neighbors into account.

The homeowners don't know

what that benefit is

and if they did

they probably wouldn't care.

From the neighbors point of view

the homeowners

should keep buying supplies

as long as

the marginal social benefit

exceeds the cost.

That means that this point

is the optimal

for the entire neighborhood

but the neighborhood

doesn't get that point.

It gets the market equilibrium

which just compares

the cost of the supplies

with the private benefits

of the homeowners buying them.

In short, for the overall neighborhood

too little gardening work is done.

This positive externality

is a version of the free rider problem.

I could spend a lot of money

and time on making

my yard beautiful

and that would make

my property values rise

but my property value

would also rise

if I just sat back

and let my neighbors spend time

and effort on their yards.

If I do that

I can keep my money for a new grill

that just benefits me

and still enjoy the benefits

of my neighbors efforts.

But my neighbors have exactly

the same incentives.

So we're all looking at each other

waiting for someone else

to invest in yard maintenance.

So a whole neighborhood ends up

with a sub optimal level of yard care.

In that sense a positive externality

is a mirror image

of a negative externality

where we all produce and consume

too much of a harmful product

because we're waiting for someone else

to take one for the team.

Now this may seem like

sort of a low-stakes situation

when we're talking about yards

but the same logic

of a positive externality

applies to more important things

like getting vaccinated

or driving a fuel-efficient car.

Public goods like police,

fire departments, courts,

infrastructure, and national defense

are also cases

of positive externalities.

We're all better off

when these are provided

but we all have an incentive

to wait for somebody else

to pay for it

and then enjoy the benefits.

For these reasons economists

are generally supportive

of government action

to do things like require vaccination

and collect taxes pay for public goods,

and now you know why

homeowners associations

can be so annoying.

They're trying to overcome

a positive externality.