Question

42. Give one example of a negative externality in the smart phone market. Model this externality with a graph. Explain a positive externality in the smart phone market. Model this externality with a graph.

**This is all one question, please kindly reply with answers to show negative and positive externalities in two separate graphs. Thank you!

Answer 1

Negative externality

MSC MPC Price ($) P MSB Q1 Q Quantity

It refers to the external cost imposed by the producer or the user on to the society. It affects the society by imposing a negative cost on to them, and thereby Increase marginal social cost.

In case of smart phone market, use of smartphones emits harmful radiations in the environment which affects the people by exposing them to the harmful effects of radiation in the form of headaches and other diseases.

As one can see, free market outcome Q is greater than socially efficient outcome Q1

This means in order to maximize efficiency, mobile phone production must be reduced to Q1

Positive externality

It refers to the positive external benefits imposed by the user or the producer of a good on to the society.

In case of smartphones, they impose a positive external benefit to the users by helping them access their email as well as other office documents over phone which otherwise could only be accessed through their mobile phones.

As one can see, positive externality increases marginal social benefit.

MSC Price ($) P MSB MPB QQ Quantity

This makes market outcome Q less than socially efficient outcome Q1