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Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect
Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is adverse, it is called a externality. The following graph shows the marginal social benefit and marginal social cost curves for a good with this type of externality. The dashed drop lines on the graph reflect the free market price and quantity for this good. Shift one or both of the curves to reflect the presence of the externality. (Hint: If there are incidental costs, then you should shift the marginal social cost curve (MSC) curve to reflect the incidental costs associated with the good; similarly, if there are incidental benefits, then you should shift the marginal social benefit curve to reflect the incidental benefits.)
1. Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is adverse, it is called a externality. beneficial this type of externality. The dashed drop lines on The following graph shows the marginal social benefit and marginal social cost curves the graph reflect the free market price and quantity for this good. detrimental
Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. ? MSC MSB MSC PRICE (Dollars per unit) MSB QUANTITY (Units) than the socially With this type of externality, in the absence of government intervention, the free market quantity produced will be optimal quantity greater Which of the following generate the type of externality previously described? Check all that apply. less A microbiology lab has published its breakthrough in swine flu research. Hilary has planted hundreds flowers in her front yard, beautifying the neighborhood both for herself and for her neighbors. The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents. Your roommate, Kevin, has bought a bird that keeps you up at night with its chirping,
Expert Solution
Solution:
An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is Adverse, it is called a Negative externality.
With this type of Negative externality, in the absence of government intervention, the free market quantity produced will be Greater than the socially optimal quantity.
Which of the following generate the type of externality previously described?
Last two points of listed choices would be correct for generating negative externality. i.e.,:
---> The local airport has doubled the number of run ways ,causing additional noise pollution for the surrounding residents.
---> your roommate ,kevin ,has bought a bird that keeps you up at night with its chirping.
Above Both points generates negative externalities since the impact on the third party is Adverse.
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