Question

Explain a positive and negative externality that you have recently consumed. Please relate your answer to the characteristics of elasticity. Why does the government have to get involved when an externality is present in the market?

400 words

Answer 1

Positive externality- if consumption/production of a Good benefits third party. since in my country government provides vaccine for various communicable diseases I am protected from getting infected as others are also vaccinated.

Negative externality- if consumption/production of good harms a third party. Example if an industry near my residence produces goods that involves harmful chemicals and the industry emmits harmful gases I am vulnerable to health issues such as respiratory diseases.

The government meeds to interfere in the market when an externality is present as the demand for good is distorted as people dont realise the good has external effects.

A positive externality good for example is called merit good. Example education and health. The demand for such goods are less than what it should be. Thus the benefits of positive externality goods are under estimated. To resolve this distortion the government enters. The private marginal benefits are lower than the social margina benefits. Thus the demand curve for a society is higher than that of an individual. The government interferes to solve the problems that such externality poses. Problems of free riders. That means as private marginal benefit is lower the demand curve of individual will be lower than that of society. The individual will want to pay a lower price but will get all benefits as he is a part of society. Thus government enters to either provide the good at lower price or increase the awareness of consumers of the vood and positive externalities that it brings in. Such that the social marginal benefit curve is the demand curve.

Similarly for example the negative externality good the cost of the good is higher than actually assumed. As the social marginal cost curve is higher than the private marginal cost curve. The government has to interfere to increase the taxes of such goods like putting taxes on polluting industries or taxing bad goods like alcohol.