Question

1. Distinguish between positive and negative externalities. Give an example of each. How does the government get involved in each?
   

OR

2. Compare and contrast private and public goods. Explain how the characteristics of a public good lend itself to having free-riders. Give an example.

OR

3. Describe in detail why the marginal benefit of cleaning up pollution is decreasing and the marginal cost of cleaning up pollution is increasing. Next, explain how the optimal level of pollution is found using the information.  

Answer any one of these question in 1-2 paragraphs and site the website for the answers. please reply ASAP.

Answer 1

The cost or benefit that affects a third party who did not choose to incur that cost or benefit is called as an externality. Externalities can be both positive as well as negative and can stem from either the production or consumption of a good or a service.

A positive externality occurs if the production and consumption of a good or a service benefits a third party who is not directly involved in the market transaction. When there is positive externalities, the benefit to society is greater than personal benefit. Therefore with a positive externality, the Social Benefit outweighs the Private Benefit. For example, when a person quits smoking, it causes benefits to other people in the society as they no longer suffer passive smoking. Positive externality leads to under consumption or under production and market failure. Government can play a role to overcome this market failure. It increases demand for goods and services by providing subsidies for goods or services that generate the spillover benefits. Such subsidies provide an incentive for firms and society to increase the production or consumption of goods or services that provide positive externalities.

Negative externality occurs when the consumption or production of a good causes a harmful effect to a third party. When there is negative externalities, the cost to society is greater than personal cost. Therefore with a negative externality, the social cost outweighs the private cost. For example, Pollution is a negative externality. Negative externality leads to over consumption or over production and market failure. Government can play a major role in reducing negative externalities by taxing goods or services when their production or consumption generates spillover costs. This taxation effectively increases the cost of producing or consuming such goods or services.