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?

Solutions

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 1 month ago

Next > < Previous

Related Solutions

Respond to the statement , "Externalities are unintended costs or benefits that are imposed on unsuspecting...

Respond to the statement , "Externalities are unintended costs or benefits that are imposed on unsuspecting people and that result from:" List 3 examples from your personal life. Make sure to use 3 benefits and 3 costs.

Classifying Costs The following is a list of costs that were incurred in the production and...

Classifying Costs The following is a list of costs that were incurred in the production and sale of large commercial airplanes: Classify each cost as either a product cost or a period cost. Indicate whether each product cost is a direct materials cost, a direct labor cost, or a factory overhead cost. Indicate whether each period cost is a selling expense or an administrative expense. Costs Classification a. Cost of electronic guidance system installed in the airplane cockpit b. Special...

Classifying Costs The following is a list of costs that were incurred in the production and...

Classifying Costs The following is a list of costs that were incurred in the production and sale of large commercial airplanes: Classify each cost as either a product cost or a period cost. Indicate whether each product cost is a direct materials cost, a direct labor cost, or a factory overhead cost. Indicate whether each period cost is a selling expense or an administrative expense. Costs Classification a. Salary of chief compliance officer of company b. Power used by painting...

To what extent do externalities cause inefficiencies in the production and consumption of goods and services?

The following is a list of costs that were incurred in the production and sale of...

The following is a list of costs that were incurred in the production and sale of large commercial airplanes: Classify each cost as either a product cost or a period cost. Indicate whether each product cost is a direct materials cost, a direct labor cost, or a factory overhead cost. Indicate whether each period cost is a selling expense or an administrative expense. p. Metal used for producing the airplane body q. Annual fee to a celebrity to promote the...

Explain the benefits and costs associated with a company's disclosure of information.

Discussion Topic: Discuss the health benefits and health risks associated with alcohol consumption.

1). costs are costs that are incurred for the production requirements of a certain period. T/F...

1). costs are costs that are incurred for the production requirements of a certain period. T/F 2) budgetary slack can be avoided if lower and mid level managers are requested to support all of their spending requirements with specific operational plans. T/F 3) for an automotive repair shop the wages of mechanics would be classified as direct labor cost. T/F 4) when goods are sold their cost are transferred from work-in-process to finish Goods T/F

Negative externalities are production costs that are borne by third parties. In the classic example, such...

Negative externalities are production costs that are borne by third parties. In the classic example, such externalities are the effects of pollution caused by steel mills, chemical plants, etc. Of the many proposed taxation policies designed to penalize producers responsible for creating negative externalities, perhaps the most contentious is the "carbon tax". What are the arguments for and against a carbon tax? How would the tax affect the competitiveness of the exports of countries imposing such a tax? What steps...

Compare the Mariginal benefits and the marginal costs associated with buying a home

Subjects