Question

The motivation for regulation is the presence of market failures, present an example of positive externality and another of negative externality

Answer 1

Ans.: Positive externality :

This occurs when the consumption or production of a good causes a benefit to a third party. For example:

• When you consume education you get a private benefit. But there are also benefits to the rest of society. E.g you are able to educate other people and therefore they benefit as a result of your education. (positive consumption externality)
• A farmer who grows apple trees provides a benefit to a beekeeper. The beekeeper gets a good source of nectar to help make more honey. (positive production externality)
• If you walk to work, it will reduce congestion and pollution; this will benefit everyone else in the city.
• Getting a vaccination provides a benefit to other people in society because you do not spread infectious diseases.
• A decision to stop smoking causes benefits to other people in society who longer suffer passive smoking.
• Switching from conventional farming to organic farming helps the environment as there is fewer chemicals in the environment.
• Picking up litter makes the environment nicer for everyone.

Negative externality :

Negative externalities occur when the product and/or consumption of a good or service exerts a negative effect on a third party outside the market. An ordinary transaction involves two parties, i.e., consumer and the producer, who are referred to as the first and second parties in the transaction. Any other party that is not related to the transaction is referred to as a third party.

Some of the examples of negative production externalities include:

* Air pollution

* Water pollution

* Farm animal production

* Passive smoking

* Traffic congestion

* Noise pollution