Answer to Question #102852 in Microeconomics for Faraz Ahmed

Question

Define a market failure and distinguish between negative and positive externalities. Give at least two examples of each- prefer those not identified in your textbook. For examples of negative externality identify the external costs (third party costs); for examples of positive externality, identify the external benefits (third party benefits). In the case of negative externalities, how can the government internalize, force the producer to pay for, the external costs of his/her production?

Answer 1

Market failure is a situation where goods and services are not free and they lead to nett loss of their economic value.

Negative externality happens when other people are harmed by the economic action while positive externality happens when people are being helped when economic action takes place.

Two examples of negative externalities;

Water pollution and air pollution

Examples of positive externalities;

Bee keeping and pollination, Apps that promote the "sharing" of scarce resources.

External cost includes the cost of pollution from industrial production in the negative externalities.

Positive externality benefits include the use of resources which you pay less and use more products from those projects and resources.

In a negative externalities a government can internalize,force the producer through taxing goods when their production generates spillover costs and this taxation could effectively increase the cost of producing such goods since the higher the cost the better because it reflects the true cost of production and this will reduce the level of pollution because people will fear from high taxation.