Question

Please provide an example of something that might have a positive externality? Please provide an example. Would this item most likely be over-produced or under-produced? What might the government do to try to correct this situation?

In contrast, what is a negative externality? Please provide an example. Would this item be most likely to be over or under produce? What might the government do to try to correct this situation?

Answer 1

Positive Externality

A positive externality occurs when the production or consumption of a product provides benefit to a third party. It arises during the production or consumption of goods or services. A most common example is a beekeeper who keeps bees for honey. His bees will help in pollinating outside crops, the value of the crops may even exceed the value of honey produced by the beekeeper.

Another example is education when a person educates himself he not only benefits himself but also society as a whole.

A positive externality is most likely to be under-produced without government intervention, like how education and public transport will be consumed without government.

The government subsidizes these products to achieve maximum market efficiency. The market efficiency of a product is more than what would be produced in a free market where there is no government intervention. Like the Indian government subsidizing passenger train tickets because it benefits the economy much more as it allows more people to travel distances.

The government can also put rules and regulations for these products like setting minimum school living age.

The government may themselves produce the item if they are under-produced like building cheap houses.

Negative Externality

A negative externality occurs when the consumption or production of a product causes harm to an unrelated third party. Pollution is termed as negative externality because unrelated third party suffers from it. For example, a factory in China produces goods for people in the USA but people living near the factory suffer from air, water, and noise pollution it may cause and also congestion it's workers and supply trucks may cause.

These negative externalities are overproduced than they should be, this is because individuals tend to ignore its cost to other people.

To curb its overproduction government may tax the goods with negative externalities or may even totally ban them forcing the producers to look for alternatives

For Example - the government of many countries puts a carbon tax on goods like petrol or electricity.

In many countries, the use of polythene bags that are thinner than a particular width is banned because they cannot be recycled but without the ban, these bags will be produced because they are cheap.