Question

Externalities are costs or benefits that are caused by producing or consuming a good but that are not included in the market price for the good. They are simply the unintended side effects of market activities. Externalities can be positive or negative. One example of a positive externality might be when beekeepers provide a means of pollination for fruit growers. Air, water, and noise pollution are examples of negative externalities.

Please answer the following questions to describe an instance in which you, an acquaintance, or family member has experienced an externality. Please use economic concepts, and use references in your main contribution.

1. How did it affect you (or your acquaintance or family member?) Please explain.
2. What were the effects? Please explain.
3. Did you (or your acquaintance or family member) experience increased or decreased health or quality of life? Please explain.
4. If you choose to write about a negative externality such as pollution, what do you think is the best way to reduce pollution? Please explain.
5. If you choose to write about a positive externality, what is the economic problem that positive externalities create? How would you resolve that? Please explain.

Answer 1

a. Setting up of plastic industry in the neighborhood of the area of our family members led to increased level of pollution in the area. This is the case of negative externality where there is loss caused to the third party in the form of decline in air quality because of increased pollution level in the area.

b. The effects were problem of breathing and respiratory aliments to the people living in the neighborhood of the area where the industry was set up.

c. Our family members experienced decreased heath and quality of life because of setting up of the industry.

d. The best way to reduce pollution is to levy taxes on the production of the good which is creating pollution. This will increase their cost of production and move the private market equilibrium closer to socially efficient level of equilibrium.

e. The problem with positive externality is that the private market equilibrium leads to under provisioning of the good as private quantity is less than socially efficient level of quantity. This can be resolved by levying subsidies on the production of good having positive subsidies which will reduce cost of production and thus increase the equilibrium output produced.