2. For each of the following, specify whether any linkages existing across diffe

Question

2. For each of the following, specify whether any linkages existing across different markets arise due to real or pecuniary externalities. For real externalities, explain whether the externality is positive or negative and whether the presence of the externality is associated with production or consumption in a specific market. (a) The forestry industry builds roads in order to harvest stands of timber in remote locations. The roads allow outdoor enthusiasts to gain easier access to the bac country for recreational activities such as hiking, fishing, hunting, etc (b) The price of gasoline decreases, this leads to lower fuel costs in the airline industry. The price of air travel decreases and the amount of air travel increases. (c) Drivers of cars contribute to air pollution in a city. Cafes and restaurants along a busy boulevard have outdoor seating close to the road. The restaurant and cafe owners find they must wash the tablecloths more frequently because of the sooty exhaust along the boulevard. Restaurant and cafe patrons find that the dining experience is less pleasant because of the exhaust fumes. (d) A hydroelectric project (electricity generation) requires the construction of a dam at location C along a river. The dam alters fish habitat downstream of location C lowering the fish population and affecting recreational fishing.

Explanation / Answer

a. This is an example of Positive Real Externality because the construction of the road has made the back country more easily accessible to the enthusiasts thereby proving to be a positive thing for them. Also, it is real externality because the easy access will now lead to more demand for recreational activities.

b. This is an example of Pecuniary Externality because the decrease in the prices of gasoline has a positive effect on the flight customers as the price of the fuel decreases for the airline industry thereby making it cheaper for them to travel by air and hence greater demand.

c. This is an example of Negative Real Externality because the restaurants are facing lower demand due to the dirt and unclean tablecloths. The fumes of the cars are creating negative externality for the cafes and restaurants as they are losing customers and also incurring extra expenses of keeping the property clean.

d. This is an example of Negative Real Externality because the resources i.e. fish habitat is getting adversely affected. The population of the fishes is dwindling and the fishing activity is being hampered.

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