Question

Goods that are accompanied by negative externalities are priced lower than is socially ideal. But, oddly, goods that are accompanied by positive externalities are also priced lower than is socially ideal. Explain this apparent paradox.

Answer 1

Goods that are accompanied by negative externalities are priced lower than is socially ideal because they have higher social costs in comparison to the price of the product.

But the goods which have positive externalities are also priced lower than is socially ideal because they are new or the economy has not realised the goods true potential. For example electronic cars are priced lower which have positive externalities and as the consumers should be able to afford and buy more electronic cars they are priced lower so that there is more demand for the product.

Also goods with positive externality such as healthcare and education need to be spread out, accessible and universal as much as possible and thus there is a need for it to be affordable in the long run, which reduces the price of the product.

Additionally in the beginning positive externality goods are inherently undervalued by the individuals and firms as it is a novel product such as electronic cars and they don't have enough consumer confidence as they don't know how long the product is going to last and how many people will buy the product in the long run.