Externalities can take several forms; however, we usually focus on negative prod

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.

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