Question

Answer the following two questions for each of the following examples: (i) smoking by individuals; (ii) toxic waste production by firms; (iii) research and development by a high-tech firm; and (iv) individual vaccination against communicable illness.

a. is there an externality? If so, describe it, including references to whether it is positive or negative and whether it is a consumption or production externality.

b. If there is an externality, does it seem likely that private markets will arise that allow this externality to be internalized? Why or why not?

Answer 1

(A) :- is there an externality? If so, describe it, including references to whether it is positive or negative and whether it is a consumption or production externality.

:-Smoking by individuals generates negative consumption externalities by generating secondhand smoke.

:- Toxic waste production by firms generates negative PRODUCTION externalities BECAUSE the harm (or toxicity) is by - product of the firms production.

:- Research and development by a high tech firm generates postive production externalities when the result of that research expand the knowledge and productivity of all firms.

: -Individual vaccinations genrate postive consumption externalities by reducing the number of people in the population who have a communicable illness.when the number of infected people is reduced, the probability of catching the illiness is reduced for everyone.

(B).If there is an externality, does it seem likely that private markets will arise that allow this externality to be internalized? Why or why not?

:-The problem of second hand smoke is unlikely to be solved by private markets.smoke is widely dispersed, making it difficult to account for and negotiate with with every affected person.in addition, the value of smoking a single cigarette is likely to be small relative to the transaction costs of negotiating the solution.

:- The problem of toxic waste might be amenable to a private market solution.The generator can be easily identified, and a finite number pf people in a localized town or community are likely to be affected. If local residents have property RIGHTS to restrict Toxic waste productions,it should be relatively easy for a firm which places a high value on the ability to produce Toxic waste to compensate them in exchange for the right to pollute

:- A firm that purchase a patent or license is in some sense using a market mechanism to partially compensate the reaserching firm for its contribution to the knowledge base, however, it is hard to completely restrict or contain the flow of information.it is unlikely that a private market for intellectual property could completly internalize this externality

:- Private compensation for the reduced risk of exposure associated with vaccinations seems unlikely. It would be virtually impossible to identify the benificiaries of incresed vaccination rates.