Externality examples

Question 1

Positive consumption externality and example

Answer 1

For example, when someone gets vaccinated, they not only protect themselves from disease but also reduce the likelihood of spreading the illness to others, thereby benefiting the wider community

internalising positive consumption externality would . For example a subsidy for vaccination could be given to lower the cost for individuals and encourage more people to be vaccinated.

Question 2

Negative Consumption Externality and example

Answer 2

A negative consumption externality occurs when the consumption of a good or service imposes costs on third parties who are not directly involved in the transaction.

Smoking:
When individuals smoke, they not only harm their own health but also expose others to second hand smoke, which can lead to health problems for non-smokers.

Alcohol Consumption:
Excessive drinking can lead to increased healthcare costs, accidents, and social issues that affect the wider community.

Loud Music:
Playing loud music late at night may disturb neighbours, leading to a loss of sleep and reduced well-being for others.

Question 3

Positive Production Externality

Answer 3

A positive production externality occurs when the production of a good or service generates benefits for third parties who are not directly involved in the production process

For instance, when a company invests in research and development to create a new technology, it not only benefits the company itself but also contributes to technological advancements that benefit society as a whole.

Question 4

Negative Production Externality

Answer 4

A negative production externality occurs when the production of a good or service imposes costs on third parties who are not directly involved in the production process.

For instance, when a factory produces goods and releases pollution into the air, it not only affects the factory itself but harms the health of nearby residents and pollutes the environment