Question

1. Give an example of a positive externality you experienced or produced recently. Explain why it is a positive externality.
2. Give an example of a negative externality you experienced or produced recently. Explain why it is a negative externality.
3. Are any of the externalities you described above causing serious problems? If so explain why. What solution would you propose to deal with this problem?
4. Are externalities efficient? Explain.

Answer 1

Example of Positive Externality: My neighbourhood has recently planted an "Arabian Jasmine" plant in his garden but the fragrance of its flowers reaches my home and my garden too which gives is so satisfying. Even though he has planted it but somewhere I am also benefiting from it. It is a positive externality because actions of other people are benefiting me or increasing my utility levels.

Example of Negative Externality: A factory which is producing so much pollution in the area that is problematic to everyone and causing serious health hazards. This is a negative externality because actions of other people are decreasing my utility level, they are giving problems to me, harming me.

The negative externality is causing serious problem. the factory is emitting harmful chemicals into the air and polluting the environment which is causing harm to not only humans but also to the animals. To solve this problem of negative externality, government intervention is needed. The government can assign the property rights to people who are living in that area with the rights to have clean air or provide the rights to the firm to create pollution. The most common alternative is that government can ask the firm to install anti pollution devices or machinery or government can directly impose tax on emitting the pollution to the firm.

No the externalities are not efficient. In case of positive externality, the good or service is always under-produced as compared to the socially efficient level. In the case of negative externality, the good or service is always over-produced as compared to the socially efficient level. In both cases, some intervention is needed to achieve the socially efficient level.