Externalities are costs or benefits associated with consumption or production that are not incurred by the...

Externalities are costs or benefits associated with consumption or production that are not incurred by the consumer or producer and are therefore not reflected in market prices. The cost or benefit of an externality remains external when falling to parties other than the buyer or seller.

Respond to the following:

Describe some differences between a positive externality and a negative externality.
Provide one example of a positive externality and a negative externality, respectively. Explain your reasoning.
How could you solve your examples of externalities to attain market efficiency?
Does the government need to intervene with externalities to affect market efficiency?

Expert Solution

Positive externality- When the consumption or production by one affects others positively that is benefit others is called a positive externality.

Negative externality- when the consumption or production by one affects others negatively that incurs a cost to others is called a negative externality.

Example of positive externality- Vaccination has a positive externality. if one person who suffered from viral infection takes vaccine, it benefits the society from not spreading the disease.

Example of negative externality- Smoking creates negative externality. If one person smokes, it affects the neighbors along with that person. So it incurs a cost to society.

Solution- In case of positive externality, if supply increased, quantity would increase and can meet the social optimum level.

the free market price is p1 and the quantity is Q1. but if supply increased and the supply curve shifts to right, that is at social marginal cost price is p2 and the quantity is at efficient level Q2. In the case of vaccination, if cost of vaccine decreased and the supply is increased, efficient level can be reached.

In case of a negative externality, if the cost of production increased and social cost curve (supply) shifts to left, efficient level can be reached.

Here the free market price is P1 and the quantity is Q1. If the supply decreased that is at the level of social marginal cost the price is P2 and the quantity is Q2. So by decreasing the supply efficient level can be reached. In case of smoking if the supply of cigarettes decreased at a high price quantity also be decreased.

Government intervention is needed to set the production at an efficient level. In the case of positive externality by government subsidy supply can be increased which helps to reach at a social optimum level.

In case of negative externality govt tax on suppliers can increase the cost of production which decrease the supply and socially efficient level of production can be reached.

Rahul Sunny answered 9 months ago

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Question

Externalities are costs or benefits associated with consumption or production that are not incurred by the...

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Related Solutions

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