Question

Compare and contrast a positive and a negative externality. Can you think of an example of an externality that is not being addressed in society? Please use at least 400 words.

Answer 1

Externalities are defined as the economic activity's positive or negative impact on unrelated third parties. Because the causers are not directly affected by externalities, they are not going to take them into consideration. As a result, these activities ' social costs (or benefits) differ from their individual costs (or benefits), resulting in a market failure.
Positive externalities are considered to be economic activities which have positive effects on unrelated third parties. They may be present in the form of externalities of output or consumption, as we have discussed above.

Positive externalities of production are positive effects that arise during a good or service's production process. An example of this might be a beehive orchard. In this situation, both the farmer and the beekeeper benefit from each other, although in their decision-making from an economic perspective, none of them has taken into account the needs of the other.

Positive externalities of consumption are positive effects on third parties resulting from a good or service consumption. A possible example might be the flower garden of your neighbor. She likely grows the plants for her own enjoyment alone, yet you can still admire the flowers ' beauty as you walk around.

Generally speaking, the overall benefit of positive externalities for society is greater than that perceived by the participants in their decision-making process. It leads to an undersupply for society with useful goods or services. In order to correct these market failures, it is important to know whether the externality arises from the manufacturing or consumption side as this affects the desired optimal market balance.

Negative externalities are characterized as economic activities that affect unrelated third parties with negative effects. These can be further divided into negative production and externalities of negative consumption.
Negative externalities of production are adverse effects that arise during a good or service's production process. Pollution caused by firms during the manufacture of their products is the most common example of this kind of externality. Pollution impacts the population as a whole; but, as long as corporations are not held accountable for it, they have no incentive to reduce their economic impact (because it would be more costly).

Negative externalities of consumption are negative effects that occur when a good or service is consumed. We can revisit your neighbor to give you an example. If she likes playing loud music in the middle of the night, sleep deprivation may be a negative externality on your part. Also, as the effects do not directly affect her, she may not take this into account.

A negative externality is pollution emitted by a factory that muddles the surrounding environment and affects the health of nearby residents. An example of a positive externality is the influence of a well-educated workforce on a company's profitability. Subsidies can also counter negative externalities by fostering positive externality consumption. One example would be to subsidize orchards planting fruit trees to provide beekeepers with positive externalities.