Question

Choose an externality that has impacted your life. Explain the situation, identifying relevant agents and discussing the MSB and MSC. Model the scenario in its market outcome. Then, proffer a potential solution that would improve efficiency and be satisfactory to you, describing the policy and modeling it as a “regulated” outcome on your model.

Answer 1

Externality is a positive or negative side effect to third party, monetary payment for which doesnt occur. Positive externality has extra positive side effect, negative externality has extra negative side effect.

A positive externality example that has impacted my life has been a park near my home. Marginal social benefit : As the plants imply pure air near my house' vicinity, scenic greenery from my house location, a good place for walk / excercise etc.

This externality effect can be included & solved, by charging all the people for the cleanliness & mantainence of park. It woud prevent it from any kind of exploitiative 'tragedy of commons' & also make people share the marginal cost of the benefit enjoyed by them due to park.

A negative externality example that has impacted my life has been a banquet hall near my home. Marginal Social Cost:  As it leads to traffic, crowd, noise near my locality. This situation could be solved by - banquet hall authorities compensating the people near the locality, for the inconvenience due to their existence operations. This would imply the MSC is monetarily accounted for. Other option can be - management & abatment policies, which would minimise the MSC components (traffic, crowd, noise). Either or both of above policies combination can be used to solve the issue.