Question

10.illustrating the direct externality, indirect externality and cross-group externality.

Answer 1

Direct externality when one of the party directly effects negatively/positively the other party. Lets say when one of the firm in locality is producing some product and while producing they dump the extract in the local river. People uses that water for direct drinking. When the quality of water reduces due to the dump extracted in the river, it is called the direct negative externality.

Take the above case and extend it further, when that water is being polluted by extracting dump in the river. People in that locality catch fishes from that river and sell it in local market to earn something so that they can survive. When the water is being polluted, fishes dies and people in the locality have no source of earning. This is called the negative indirect externality.

If a member of group 1 exerts a large positive externality on each member of group 2, then group 1 will be targeted. In broad terms, and especially in competitive markets, it is group 1 benefit to the other group that determines group 1 price, not how much group 1 benefits from the presence of group 2 . In a nightclub, if men gain more from interacting with women than vice versa then we expect there to be a tendency for nightclubs to o§er women lower entry fees than men.