Externalities are third party consequence of some other action. They can be positive or negative externalities and they impose a benefit or cost to a third party. Identify a positive and a negative externality. Discuss the benefits and costs associated with each type of externality. What happens to the Supply and/or Demand curve in each of your examples?
A positive externality refers to a beneficial consequence created by an action that positively impacts a third party who is not directly involved in the transaction. One example of a positive externality is education. When an individual pursues education and acquires knowledge and skills, it not only benefits them but also benefits society as a whole. The positive externalities associated with education include an increase in productive workforce, better social and economic outcomes, and reduced crime rates. These benefits improve the overall well-being of society.
In terms of the supply and demand curve, a positive externality shifts the demand curve to the right. This is because the additional benefits obtained by third parties increase the overall demand for the good or service. As a result, the equilibrium price and quantity both rise, leading to a socially optimal level of production.
On the other hand, a negative externality occurs when an action imposes a cost or harm on a third party. One example is pollution generated by manufacturing activities. When companies produce goods, they often generate pollution as a byproduct, leading to health issues and environmental degradation for nearby communities. The negative externalities associated with pollution include increased healthcare expenses, decreased quality of life, and a damaged ecosystem.
In terms of the supply and demand curve, a negative externality shifts the supply curve to the left. This is because the additional costs imposed on third parties decrease the overall supply of the good or service. As a result, the equilibrium price and quantity both decrease, reflecting the social costs associated with the production of the good or service.
To summarize, positive externalities bring benefits to third parties, such as education leading to a more skilled workforce, while negative externalities impose costs on third parties, such as pollution resulting in health issues. The supply and demand curves shift in opposite directions depending on the type of externality, ultimately affecting the equilibrium price and quantity in the market.