Identify whether each occurence creates a positive, negative, or inframarginal externality.
After walking by a fresh bakery, you decide to buy a donut.
A homeowner who backs up on a city park occasionally has to listen to kids playing soccer.
To identify whether each occurrence creates a positive, negative, or inframarginal externality, we need to understand the concept behind each type of externality.
1. Positive externality: A positive externality occurs when an action or decision of one party generates benefits for others who are not directly involved in the action or decision. In this case:
- After walking by a fresh bakery and deciding to buy a donut, there is a positive externality if your purchase benefits other individuals who are not directly involved. For example, if the bakery is locally owned and your purchase supports the local economy, it creates a positive externality.
2. Negative externality: A negative externality occurs when an action or decision imposes costs or harms on others who are not directly involved in the action or decision. In this case:
- The homeowner who occasionally has to listen to kids playing soccer in a city park experiences a negative externality. The noise created by the kids playing soccer imposes costs or discomfort (in the form of noise pollution) on the homeowner.
3. Inframarginal externality: An inframarginal externality occurs when an action or decision has neither a positive nor a negative effect on others. In other words, it does not create any significant benefits or costs. In this case:
- None of the given occurrences seem to create an inframarginal externality, as both the bakery visit and the homeowner's experience with the kids playing soccer have either positive or negative effects on others.
It's important to note that the determination of whether an externality is positive or negative can sometimes be subjective and context-dependent.