Question

Explain how you would either discourage negative externalities or encourage positive externalities, i.e., society encourages education by having public education that is paid for by the taxpayers and, in large part, it makes it very inexpensive for a parent to send their kids to school. Most states have laws that children must be enrolled in school. Write about at least 2 different externalities.

Answer 1

Ans) Externality is when the bystander bears the cost or benefit of any activity. It is of two types ÷ positive and negative.

Positive externality is when the bystander bears the benefit of any activity. Here social benefit is more than the private benefit. The difference between social benefit and private benefit is known as external benefit. When this external benefit is ignored, goods are underproduced. To internalise this externality, government gives subsidy equal to external benefit. Eg- to encourage more education, government gives subsidy. Government also gives Similarly, government gives subsidy on agriculture. As thse two activities helps not only the parties involved but also the third party (bystander).

external benefit social benefit private benefit Qmarket Qefficient

When bystander bears the cost of any activity , it is known as negative externality. Here social cost is more than private cost. The difference between social cost and private cost is known as external cost. When this external cost is ignored, goods are overproduced. To internalise this externality, government imposes tax equal to external cost. Eg- tax on pollution, tax on cigarettes.

external cost Qefficient Qmarket