ECO204 Week 2 Discussion 2 Externalities

Hello class,

Describe some differences between a positive externality and a negative externality.

          Externalities are basically additional (intentional or unintentional) outcomes that derive from services or goods provided.  A positive externality (sometimes harder to identify) would be something good that came out of an operation or business while a negative externality would be something outside of the choice from the buyer or seller that hurts the environment or market (Amacher & Pate, 2019. Ch. 6.2).

Provide one example of a positive externality and a negative externality, respectively. Explain your reasoning.

          An example for a negative externality is air pollution, when considering a business makes steel by using clean air and their factory, they create air pollution.  Consumers are not compensated for this pollution nor is that factored in the price of the steel, making the air pollution a negative externality (Amacher & Pate, 2019, Ch. 6.2).  A positive externality could be education, the individual and country benefit from a person being more educated.  They will be a productive member of society contributing their share; however, a price cannot be added for this benefit to the individual making education a positive externality (Amacher & Pate, 2019. Ch. 6.2).

How could you solve your examples of externalities to attain market efficiency?

          To solve air pollution, the UN can continue meeting to combat climate change like the Paris Agreement, this would direct companies to find innovative and cleaner ways of producing their goods and services while helping the environment.     That could influence people to buy and use more of their product which would create more demand which would create more revenue for the market.  To solve the education externality for market efficiency, schools can lower the sky-rocketed intuition rates, that would most likely raise the quantity demand for adults going to college and the increased number could outweigh the profit losses.

Does the government need to intervene with externalities to effect market efficiency?

          I think the government needs to intervene for in some instances to ensure that externalities are being controlled to help the overall efficiency of the market.  One example would be the government limiting the legal areas to smoke in public places.  Since there was a higher number of people who didn’t want smoking in most bars and restaurants due to the negative externalities of secondhand smoke and its associated negatives.  The government aided in banning public smoking in those areas which most likely helped the market by having more revenue by increased customers (I would assume smokers didn’t go on strike and still most likely went to the same bars and restaurants, just went outside to smoke).

Resources:

Amacher, R., & Pate, J. (2013). Microeconomics Principles and Policies. San Diego, California: Bridgepoint Education, Inc.