Question

Give an example of a negative or positive externality that you know about or have experienced. Once you have identified the externality, describe what is causing it and who it is effecting. Once you have done this, discuss the public policy or the private solution that is being applied to the negative or positive externality and discuss if it's working and how the externality is being internalized.

Answer 1

ANSWER: The beneficial externalities are termed to be the positive externalities while costly externalities are termed to be the negative externalities. Example of negative externality that I face every day in my life is the pollution. A new factory smokehouse has opened near my society. The factory affect negative externality when it produces widgets as it also pollutes the environment in the process. The pollution cost is not borne by the factory however instead shared by people in my society, producers are not taking the responsibility for external costs that exist and these are passed on to us. It affects me as I and my family have poorer quality of life, higher medical expenses, reduced aesthetic appeal of the air, etc.

The government can internalize an externality with imposition of taxes on the producer thus reducing the equilibrium quantity to the socially desirable quantity. When government imposes taxes it forces the company to reduce emissions, as a result MCA to the company equals the fee imposed by government. It leads to raise in the abatement costs and the marginal social costs fall.