1. What type of externality (positive or negative) is present in each of the fol
ID: 1110327 • Letter: 1
Question
1. What type of externality (positive or negative) is present in each of the following examples? Is the marginal social benefit of the activity greater than or equal to the marginal benefit to the individual? Is the marginal social cost of the activity greater than or equal to the marginal cost to the individual? Without intervention, will there be too little or too much (relative to what would be socially optimal) of this activity?
a. Mr. Chau plants lots of colorful flowers in his front yard.
b. Your next-door neighbor likes to build bonfires in his backyard, and sparks often drift onto your house.
c. Maija, who lives next to an apple orchard, decides to keep bees to produce honey.
d. Justine buys a large SUV that consumes a lot of gasoline.
Explanation / Answer
Answer (1) - Mr. Chau plants lots of colorful flowers in his front yard. This is a positive externality, because the flower garden will make feel better to the people those passes through the garden. Marginal social benefit is greater than marginal social benefit to the individual. Along with Mr. Chau many people will feel better, thus we can say MSB of the activity is greater than MB of individual. MR. Chau will plant less plant than socially optimal.
(2) If my next - door neighbor likes to build bonfire in his backyard then it might cause fire in my house. Neighbor is generating pollution. This is negative externality. This activity is generating external cost. MSC is greater that MC to the individual. Only person is being better but others are being worse off. Since neighbor does not realize the external cost of bonfire thus there will be more bonfires in neighbor’s backyard than socially optimal quantity of bonfire.
(3) Maija, who lives next to an apple orchard, decides to keep bees to produce honey. This is a positive externality where both Maija and owner of the apple orchard will get benefited. Bees pollinate apple trees; this will generate external benefit to the owner of the apple orchard. Marginal social benefit is greater that marginal benefit. Maija will keep fewer bees than socially optimal quantity into his farm. Maija does not take MSB into account.
(4) Justine buys a large SUV that consumes a lot of gasoline. Consumption of gasoline will generate external cost to the society thus this is a negative externality. Marginal social cost is greater that marginal social cost for individual. Thus people will want to have that SUV car. Purchase of the car will increase.
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