Externalities: Identify two actives that generate positive externalities and two actives that generate negative externalities. Be...

Externalities:

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.

Expert Solution

Positive Externality

Positive externality takes place when an economic transaction results in a gain to parties outside the activity and the parties do not pay for it.

Example 1: Vaccination programs create a positive externality. When one person gets vaccinated it reduces the chance of other persons catching a disease through contagion.Therefore, when one person gets vaccinated, it results in benefits for other parties outside this transaction. So, this is a case of positive externality.

Example 2: When a person gets an education, the education provides private benefits to the person as well as external benefits to the entire society as a whole. So, this is a case of positive externality.

Negative externalities

Negative externalities are the costs imposed by an economic transaction to parties outside the transaction and which has not been accounted for in the price.

Example 1: Suppose the waste from a factory pollutes a lake and the pollution kills fish, which reduces profits of the fishermen. This activity of the factory is imposing costs on the fisherman and the cost is not being accounted for. So, this is a negative externality.

Example 2: When one person drives a car, he/she contributes to pollution and congestion. Thefeore, the driving is imposing external costs which are not accounted for. So, this is an example of a negative externality.

Rahul Sunny answered 2 years ago

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