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Chapter 5: Problem 1

What is an externality? Give an example of a positive externality, and give an example of a negative externality.

Short Answer

Expert verified
An externality is a consequence of an economic activity experienced by unrelated third parties. It can be either positive or negative. A positive externality example is the effect of a well-educated labor force on the productivity level of a company. A negative externality example is pollution from a factory affecting the surrounding environment and health of nearby residents.

Step by step solution

01

Defining Externality

Externality in economics refers to a consequence of an industrial or commercial activity which affects other parties without this being reflected in market prices. It's the impact of one person’s actions on the well-being of a bystander. Externalities can either be positive or negative.
02

Example of Positive Externality

A positive externality is a benefit that is enjoyed by a third-party as a result of an economic transaction. An example could be the effect of a well-educated labor force on the productivity level of a company. That company might not have contributed to the education of its employees but enjoys the benefits nonetheless.
03

Example of Negative Externality

A negative externality is a cost that is suffered by a third party as a consequence of an economic transaction. An example could be the pollution emitted by a factory that spoils the surrounding environment and can affects the health of nearby residents. The costs of the factory's pollution are not paid by the factory but are borne by its neighbors or society as a whole.

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Most popular questions from this chapter

In the first years following the passage of the Clean Air Act in \(1970,\) air pollution declined sharply, and there were important health benefits, including a decline in infant mortality. According to an article in the Economist, however, recently some policymakers "worry that the EPA is constantly tightening restrictions on pollution, at ever higher cost to business but with diminishing returns in terms of public health." a. Why might additional reductions in air pollution come at "ever higher cost"? What does the article mean by arguing that these reductions will result in "diminishing returns in terms of public health"? b. How should the federal government decide whether further reductions in air pollution are needed?

Many antibiotics are no longer effective in eliminating infections because bacteria have evolved to become resistant to them. Some bacteria are now resistant to all but one or two existing antibiotics. In \(2015,\) the Obama administration proposed subsidizing research aimed at developing new antibiotics. a. Are there externalities involved in the market for antibiotics that would require a government subsidy to achieve an economically efficient outcome? Briefly explain. b. Many people have health insurance that covers the majority of the cost of their prescription drugs, including antibiotics. Does that fact make the case for a government subsidy of the production of antibiotics stronger or weaker? Briefly explain.

What is the tragedy of the commons? How can it be avoided?

In writing about the increased popularity of national parks in the United States, such as Yosemite, Yellowstone, and the Grand Canyon, environmental economist Margaret Walls wrote: When one person's visit to a park doesn't appreciably diminish the experience for others, the fee to use the park should be zero. That doesn't apply when the public good starts to experience congestion problems ... the Park Service should ... [charge] a significantly higher fee at the most popular parks during the summer months. Are Yosemite and other national parks public goods? Briefly explain. Source: Margaret A. Walls, "Protecting Our National Parks: Entrance Fees Can Help," Resources, No. \(193,\) Fall \(2016 .\)

As readers of Herman Melville's 1851 novel Moby Dick know, at one time oil made from whale blubber was an important source of energy that was widely used by households and firms in oil lamps. Other sources of energy replaced whale oil in the second half of the nineteenth century, and today many Americans consider whales only as a source of entertainment on visits to aquariums and whale watching excursions. But some species of whales-including baleen and gray whales - are in danger of extinction. The U.S. Department of Agriculture estimates that more than 9 billion chickens are raised for food annually. Chickens, unlike whales, are not threatened with extinction. Briefly explain why.
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