Question

discuss the concept of externalities and explain FOUR (4) categories of externalities?

Answer 1

An externality is a cost or benefit arising from a good or service being produced or consumed. Externalities, which may be either positive or negative, may affect an person or a particular organization, or may affect the whole of society. The externality benefactor-usually a third party-has no influence over it and rarely wants to pay expenses or profits.

In economics, there are four different types of externalities positive consumption and positive production, and negative consumption and negative production externalities.

When negative externalities are present, this means that not all costs are absorbed by the consumer, which contributes to overproduction. For favorable externalities, the consumer doesn't get all the advantages of the nice, leading to decreased demand. As an example of a factory that produces widgets with negative externality. Know, the air gets contaminated during the manufacturing cycle. The emission risks aren't covered by the manufacturer but are paid by society. If the negative externality is considered then the widget 's cost would be higher. This would lead to lower production and a more efficient balance.

Positive externalities such as education and market failure relate. The person being educated obviously benefits and pays for that cost. Beyond the person being educated, however, there are positive externalities, such as a more intelligent and knowledgeable citizenry, higher tax revenues from better-paid jobs, less crime and more stability. Such aspects also interact favorably with the standard of schooling. Such advantages for society are not taken into consideration as the customer recognizes the value of employment.Therefore, if those benefits are taken into account, education would be underconsumed relative to its level of equilibrium. Public policymakers will, of course, look to subsidize economies with positive externalities and tax those with negative externalities