Question

Which of the following is an example of a positive externality?

1. Dev mows Hiliar's lawn and is paid 100 dollars for performing the service?

2. while mowing the lawn, Dev's lawnmower spews out smoke that Hilary's neighbor has to breathe?

3. Hilary's newly cut lawn makes her neighborhood more attractive?

4. Hilary's neighbor's pay her if she promises to get her lawn cut on a regular basis?

Answer 1

The externalities are the additional costs or the benefits incurred to a third person who is not directly involved in the economic activity. It means that when the economic activity that involves two individuals takes place, and the impact is felt on the third one, the effect on the third one is known as the externality. When the product is in the form of increased costs of the individual, it is known as the negative externalities. When the impact is in the form of increased benefits of the individual, it is known as the positive externalities. Thus, the externalities can be summarized as the spillover of benefits or costs to the third party other than the immediate market participants.

The positive externality arises in the economy when the activity of an individual increases the benefits of the other individual who is not involved at all in action. In this case, the activity done by the individual is mowing his lawn. In the first and last cases, there is an increase in the cost of the third party, and thus not a positive but is a negative externality. In the second case, it is again a negative externality as the neighbor is suffocated with smoke by the lawnmower of the individual. Only in the third case where the mowing of lawn by Hilary makes the neighborhood more attractive makes spillover of benefits to the third party not involved in the direct action in the economy. Thus, the example of a positive externality is option 'c'.