Question

Answer the following questions for each of the following examples: (i) keeping your front yard in great shape; (ii) pollutants dumped in the air and water by petroleum refineries in CC; (iii) a professor working on Alzheimer research; and (iv) getting vaccinated for flu

If there is an externality, does it seem likely that private markets will arise that allow this externality to be internalized? Why or why not?

Answer 1

Externalities refers to the cost and benefits incurred by a third party who did not directly take part in that activity .The externalities can be both positive and negative. Positive externality occurs when the third party benefits from the production and consumption services eventhough the third party is not directly involved in the market transaction.In the above example i)keeping your front yard in great shape is a positive externality ii)pollutants dumped in the air and water by petroleum refineries in CC is a negative externality.Because when the pollutants are released in the air the other people may inhale it and it may cause various diseases it is a negative externality iii) a professor working on Alzheimer research is a positive externality iv)getting vaccinated or flu it is a positive externality.
Negative externalities occurs in the private markets the public goods may lead to the externalities and there can be free rider problem and the consumers will enjoy the benefit of consumption without actually paying for it .This goods are unprofitable to be sold in the private market

In the diagram given below PMC refers to Private Marginal Cost and SMB refers to Social Marginal cost