Externalities can take several forms; however, we usually focus on negative prod
ID: 1119476 • Letter: E
Question
Externalities can take several forms; however, we usually focus on negative production externalities because they are so common. Provide an example for each case.
i. A negative externality in production (i.e. the social marginal cost is higher than the private marginal cost)
ii. A negative externality in consumption (i.e. the social marginal benefit is lower than the private marginal benefit)
iii. A positive externality in production (i.e. the social marginal cost is lower than the private marginal cost)
iv. A positive externality in consumption (i.e. the social marginal benefit is higher than the private marginal benefit)
Explanation / Answer
i. A negative externality in production (i.e. the social marginal cost is higher than the private marginal cost)= Production of chemical good creates toxic wastes and generates pollution.
ii. A negative externality in consumption (i.e. the social marginal benefit is lower than the private marginal benefit) = If you like to listen to loud music, you are harming others through noise pollution.
iii. A positive externality in production (i.e. the social marginal cost is lower than the private marginal cost) = Agricultural production adds to natural beauty and greenery of land.
iv. A positive externality in consumption (i.e. the social marginal benefit is higher than the private marginal benefit) = Consumption of education by one person elevates the whole society because he will spread the power of education through his actions and behavior.