Question

6) Efficiency, Welfare & Externalities a) Discuss the notion of externality(s)? b) Are they good or bad from an efficiency point of view? c) Provide some everyday examples of positive and negative externalities with a brief discussion. d) What is a public good? e) Give an example of a pure public good.

Answer 1

A) Discuss the notion of externality(s)?
An externality occurs when the decision or actions of one party affects a another party. These actions can be a cost or benefit to the third party who have no influence over the cost or advantages. Externalities can come from producing or consuming a good or service.They are considered as a classic form of market failure.

B) Are they good or bad from an efficiency point of view?
Positive externality like the development of schools and providing education to all diminishes crimes, spreads knowledge on health and wellness. Due to this reason, governments intervene in helping people not due to a moral point of view but due to the efficiency it generates in the long run which increases productivity of the economy as a whole.

Whereas, negative externality can be bad for the society. Imposing taxes is one way to overcome negative externalities like pollution. Rather than putting the weight on individuals breathing air, the government can put a tax assessment on pollution. This tax would discourage activities that impose a net expense to a third party. Therefore, by imposing this type of tax, it will reduce the market outcome of the externality to an amount that is considered efficient.

C) Provide some everyday examples of positive and negative externalities with a brief discussion.
Externalities can be positive or negative.

Pollution, traffic congestion is a common negative externality, whose cost influences the public in general. Here, the government can intervene by setting environmental regulations, or place a monetary tax on pollution. This will reduce the market outcome of the externality.

Positive externalities can be the improvement of roads, drainage, hospitals, schools, airports, etc. The government can raise economic well-being by dealing in more infrastructure projects as this would have a positive effect on the quality of life and maintain economic development.

D) What is a public good?
Public goods are those goods which are non-excludable in which individuals are not excluded from enjoying the goods that are available and non-rivalrous in which consumers can consume goods without depriving it from others.

E) Give an example of a pure public good.
Pure public goods are non-excludable and non-rival in nature. They are known to be collective consumption goods. One example is fresh air and the use by one consumer does not exclude and deplete the amount of it to other consumers. Other examples are national defense, sewage and water systems, street lights, free available knowledge like online learning, public parks.