Question

Give an example of each of the following: a) a positive externality in consumption b) a negative externality in consumption c) a positive externality in production d) a negative externality in production

Answer 1

a. Positive Externality in Consumption : An example of positive externality in consumption is consumption of Vaccines. The marginal social benefit of vaccination exceeds its marginal private benefit for the person because it also reduces the likelihood of other persons getting the disease and thus is an example of positive externality.

b. Negative Externality in Consumption : Consumption of Cigarettes by a person is an example of Negative Externality in Consumption because it not only harms the person having the cigarette but also the person harms other person equally because of harmful effects of passive smoking.

c. Positive externality in production- Increase in expenditure of the nation on research and development has positive spillover effects on the local businesses and also help them in improving their efficiency and thus has positive externality in production process.

d. Negative externality in production- A manufacturing firm throwing its waste in the nearby river which is used for catching fish by the locals and thus reducing number of fishes in the river has a negative impact on the locals of the area.