Quiz 10: Externalities


Positive externality: Positive externality is a benefit that arises from production or consumption that availed by someone who is not a producer or consumer. Hence, the benefits will go to the third person without paying for it. Earning income by performing a service will not be benefitted to a third person who is not involved in the activity. Hence, there will be no externality from this service. Neighbors have to breathe smoke if a person mows lawn as the lawnmower spews out smoke. This will cause the neighbors to feel uncomfortable. Hence, the act of cleaning mob will give negative externality. A person cuts his/her lawn and makes it more attractive to the neighbors staying around. Hence, it will give positive externality. Neighbors of Mrs. H are willing to pay her if she promises to get her loan cut regularly and maintain clean. Since the neighbors are paying for this service, it does not give positive externality. Hence, the option 'c' is incorrect.

The Club which is a 'steering lock,' is a negative externality on other car owners as club prevents the car from being stolen; this makes the thief to go for another car without a steering lock. Making the procession of The Club a negative externality to the non Club installed cars. Lojack helps the police in tracing the car and at the same time confuses and discourages the thief as he could not make out which car has it and which car did not. This will not prevent it from taken away by the thief but would make them less as more thieves would be caught. Hence, this conveys a positive externality on the other car owner. The policy implications are, as the Club poses a negative externality we can levy a tax on the users of the Club to internalize the negative externality. And as the Lojack gives a positive externality, the government should subsidize the product to internalize the positive externality.

Negative externality means, a third party or third person affected destructively because of consumption and production of a good. Positive externality means, a third party or third person affected benefits, because of consumption and production of a good. Some Examples of Negative externality as follows: - Exhaust from automobiles - Health problems due to air and water pollution - People staying near chemical industry - River near harmful Industries Some Examples of Positive externality as follows: - Restoration of historic buildings - Help to educate other people and therefore they benefit as a result - Stationary shop near educational institute - Restaurant near office or educational institute Negative externality - People are affected badly near pharmaceutical industries without their intervention. Positive externality - Outside stationary shop vendor get benefited due to educational institute.