Which of the following would result in a positive externality?
A) A local government establishes a price ceiling on rental apartments.
B) An electric utility burns coal that causes acid rain.
C) Medical research results in a cure for malaria.
D) McDonald’s adds new fat-free items to its menu.
The Correct Answer and Explanation is:
Correct Answer: C) Medical research results in a cure for malaria.
Explanation:
A positive externality occurs when a third party—someone not directly involved in a transaction or activity—benefits from it without paying for that benefit. In economics, this represents a market failure because the full social benefits of the activity are not reflected in market prices. As a result, positive externalities often lead to underproduction or underinvestment in those activities from a purely private market perspective.
Option C, “Medical research results in a cure for malaria,” is a clear example of a positive externality. When medical researchers develop a cure for malaria, not only do the patients who receive the treatment benefit, but society at large also experiences advantages. These include:
- Reduced transmission of the disease.
- Lower healthcare costs for governments and individuals.
- Increased economic productivity as healthier people can work more effectively.
- Enhanced public health outcomes, especially in malaria-prone regions.
Because these benefits spill over to people who were not directly involved in or paying for the medical research, they qualify as a positive externality.
Let’s briefly consider why the other options are incorrect:
- A) A price ceiling on rental apartments may lead to housing shortages and market inefficiencies, but it does not generate external benefits to third parties.
- B) Coal burning causing acid rain is a negative externality because it harms the environment and public health, imposing unaccounted-for costs on society.
- D) McDonald’s adding fat-free menu items is a business decision responding to consumer demand. While it may improve individual health outcomes, the broader societal benefit is limited and indirect, making it less clearly a positive externality compared to medical breakthroughs.
Thus, Option C best illustrates a situation where the benefits extend beyond the immediate participants, fulfilling the definition of a positive externality.
