Question

Define both negative and positive externalities? Give real life examples of each?

Answer 1

A negative externality is the cost borne or suffered by a third party as a result of any economic transaction . In an economic transaction, the producer and consumer are the first and second parties, and third parties may include other individuals , property owner etc . As for example , pollution created by factories . Here the factories are producers , people who buy the product are consumers . But factories emit harmful gases , this causes air pollution . Hence , people residing near factories have to suffer due to this production process . This is a case of negative externality .

On the ther hand , positive externality is a benefit that is enjoyed by a third-party due to an economic transaction . Third-parties include any individual, organisation, property owner, or resource that is indirectly affected . As for example a good school providing education at a very low cost . The school is the producer of education . Students are consumers . These students becoming educated can be beneficial to the economic progress of the nation or can teach others who require education . This creates positive externality .