Question

Briefly discuss the concept of externality (positive and negative) using an example related to health care. Your text book uses the example of a smoker in a crowded room that imposes costs on everyone else in the room. Use a different health care related example to explain the concept of externality. Does every negative externality situation require a government intervention? If so, why. If not, why not?

Answer 1

A spillover effect associated with production or consumption that extends to a third party is called externality which means that externality is an affect experienced by a third party during production and consumption .A negative externality is an external effect that generates cost to a third party for example leather tanning industry pollute river and fishing is done in polluted river so now fish get contaminated and it is hazardous to eat contaminated fish which is negative externality now fishermen incurs abatement cost to clean river which is a negative externality. Positive externality is an external effect that generate positive effect to a third party for example by planting tree in garden the atmosphere get fresh air and nearby people get clean air which is good for lungs which is positive externality .Government should intervene in every negative externality because negative externality can lead to a situation of a market failure and to run economy efficiently and for the welfare of people it is necessary for the government to intervene.