Question

Give two examples of a negative externality and explain how they are reciprocal in nature.

Answer 1

A negative externality is harm that is caused to the third party by something in which he is neither the producer or the consumer of that product. This means that if someone is getting affected in a negative way by something he is not involved in any form (neither the seller nor the user of that thing) that is the negative externality he is facing.

Some examples of negative externality are:

1. Air pollution: This is mainly caused by factories that emit harmful gases during the production process of some good. Suppose people living nearby who do not use the product that the factories are producing are getting affected by the polluted air. This means that the polluted air (negative externality) is affecting the people who are neither the producers nor the consumers of the goods.

2. Loud music played by the neighbors: Loud music played by someone affects people living nearby. These people are the third party that is neither involved in the consumption or production of loud music but is getting affected by it in a negative way.

Negative externalities are reciprocal in nature. This means the factories are emitting harmful gases then is natively affecting the lives of people living nearby through polluted air. On the other hand, if they stop their production process thinking that they are harming people, they themselves will be at loss (as a result of the shutdown of their company) and many people will lose their jobs and livelihood.