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Explain the difference between a positive and negative externality. In your analysis, make sure to
provide an example of each type of externality. Why does the government need to get involved
with externalities to bring about market efficiency? What solutions need to be provided for your
examples?
Solution
Answer: Externality refers to the side effects of generall economic activities. Such side effects
are not internalized while taking the output decision. These effects are not reflected in the
demand and supply. Hence, such side effects either causes over production or under production.
Postive externalities: These are posive side efffects on parties not involved in transactions. For
example, inculcating the injection agains the lethal communicable diseases automatically
immunes other from being caught in disease.
Negative externalites: These are neagive side effect. The effulents unleashed by the factory
situated on the bank of rivers pollutes the river water. Polluted river waters causes a lot of
hardships to the residents residing on bank of river.
Govt must intervene to bring about the efficiency in economic system.govt must give subsidy
where the positive externality exists and on other side, if there is negative externality then govt
must tax the firms to internalize the external costs

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Explain the difference between a positive and negative externality. .pdf

  • 1. Explain the difference between a positive and negative externality. In your analysis, make sure to provide an example of each type of externality. Why does the government need to get involved with externalities to bring about market efficiency? What solutions need to be provided for your examples? Solution Answer: Externality refers to the side effects of generall economic activities. Such side effects are not internalized while taking the output decision. These effects are not reflected in the demand and supply. Hence, such side effects either causes over production or under production. Postive externalities: These are posive side efffects on parties not involved in transactions. For example, inculcating the injection agains the lethal communicable diseases automatically immunes other from being caught in disease. Negative externalites: These are neagive side effect. The effulents unleashed by the factory situated on the bank of rivers pollutes the river water. Polluted river waters causes a lot of hardships to the residents residing on bank of river. Govt must intervene to bring about the efficiency in economic system.govt must give subsidy where the positive externality exists and on other side, if there is negative externality then govt must tax the firms to internalize the external costs