Question

Identify two actives that generate positive externalities and two actives that generate negative externalities. Be sure to explain why each activity you identified generates the externality type you stated.

Answer 1

Positive externalities

1. Vaccination can lead to positive externalities as it will benefit all in society and individually from that particular disease as MPB+MEB=MSB therefore MSB=MSC . For instance, the vaccination costs $30 but as it provides a positive externality on the health of one and all as improves the productivity, hence the government will provide subsidy of $20 so that each and every individual can induce the vaccination at a cost of $10. For instance, the eradication of smallpox was due to the mass vaccination which helped all the economies around the world from coming out of this deadly disease.

2. Cycling or even walking to the place of work or study in the city helps everyone (3rd party)as we are using non-polluting methods and this provides others to breathe cleaner air and also we are reducing the congestion.

Negative externality

1. Industries sending out the chemical water into rivers pollutes the water and affects the aquatic life(3rd party) and also those who consume the fishes and this is not reflected in the price  hence inducing negative externality. Therefore to internalize this externality the government regulates the pollution level by imposing a tax equal to the MEC(marginal external cost). This increases the firm's cost of production and reduces its output, therefore, reduces the pollution level.

2. Smoking can affect not only the individual but also others around as it has spillover effects on the world with increased air pollution but also affects the lungs of those breathing the polluted air and the effect is not compensated by anyone hence inducing a negative externality.