Positive And Negative Externalities With Examples

Positive externalitiesWhat is Positive Externalities?
A positive externality, in economics, is the benefit that affects people or a group of people who did not choose to incur that benefit.

Examples of Positive Externalities:
Positive externalities exist in Vaccination program in the health care market. The existence of externalities is another cause of government involvement in any sector (ABUL BARAKAT 2007). In health sector, there are various positive externalities exist, among them the most important is positive externalities come from vaccination program in the health sector. Now we will see here why the government needs to provide vaccine not private.

Positive ExternalitiesExplanation:
In the horizontal axis shows the amount of vaccination and the vertical axis shows the marginal benefit get by public and private. If we closely look into the figure then we can observe that marginal social benefits lies above the marginal private benefit or demand curve. And the gap between marginal private benefit and the marginal social benefit is nothing but the marginal externalities. That means if the government does not take the vaccination program when the fatal disease spread across the country then the benefit that will come to those only who take the vaccine and the benefit lies below the marginal social benefit. Alternatively saying the positive externalities of vaccine does not come without the government involvement in vaccination program (Walter, 2012).

What is Negative Externalities?
A negative externality is a cost that affects people or a group of people who did not choose to incur that cost. There are many negative externalities that are basically related to environmental issues, i.e. production and use. There are various examples of negative externalities. Those are given below:

Negative Externality Examples:
Air is polluted from burning fossil fuels, emissions from burning gas, coal, and oil, water pollution, sound pollution, etc (ROSEN, 2012)

An example of negative consumption externalities: Loud music at mid night, antibiotic resistance, shared cost of falling health, higher congestion costs, etc.

Effects of negative externalities: In the case of negative externalities, the third party becomes worse off, here, the producer and the consumer are the first and second parties respectively, any organization, individuals or owner of any property can become the third parties. Negative externalities can also express as an external cost. That means because of negative externalities the third parties or a society have to incur a few portions of cost and creates a welfare loss in the society (PETEL, 2011)

Negative ExternalitiesEffects of pollution: Because of pollution generated from any industrial production the marginal social cost (MSC) curve place above the marginal private cost curve (MPC), as a result it creates some external cost in the society, which could be well understood through the following figure.

In the above figure 1, the private cost curve is MPC curve and social cost curve is MSC curve. According to MPC equilibrium at point A where they produce at point Q and set the price at point P but according to MSC curve equilibrium at point B and socially efficient level of allocation at point Q1 and determine the price level above the previous price level. So the gap between A and B is nothing but the external cost of the society in the figure-1, and net welfare loss exists in the figure-2, shown by the red area (Coase, 1960).

The Economic consequence of bad health: There is no doubt that the good health is always beneficial for any people and above all for a country whole. Without good health, there create many problems. Here we will discuss the consequence of bad health. There are many direct, indirect and social cost exists for bad health (STIGLITZ, 2010).

Direct cost: The cost of any bad health is directly imposed on the production level. Here production level falls   because of bad health. Any ill persons have always production level below the healthy people. An ill person does not concentrate in his work properly that will ultimately affect the production. On the other hand, ill person does not go to working place every day. they suffer by various diseases that will reduce the growth of any country (Coase, 1960).

Indirect cost: There are many indirect costs too for bad health. An ill person always falls in backward in every section of life. Like if an ill person becomes a student then they cannot fully concentrate in there learning, this principle is same for every person who are ill.

Social cost: Without direct and indirect cost incurred by individual there is some social cost also exist for the ill person (SAJJAG ZAHIR 2014). First of all the cost of illness most of the time bear by the government in most of the country. Or if the person is unable to bear the whole cost then the government must need to come forward for providing medical support for them. It is very big government expenditure compares with the whole expenditure incurred by the government. Foregone earning is another social cost. If anyone becomes ill then in the whole period of his illness the amount he could earn is simply called the forgone earning. The time he can earn money is the foregone earning period. This is also very important to calculate the forgone earning properly for making good policy in the health sector (Walter, 2012).

Possible Solutions Of Negative Externalities:
There are several types of possible solutions of the negative externalities. Those are given below:

Regulations that are operated in addressing the negative externalities Under the regulation, each polluter must reduce pollution by a certain amount or else face legal sanctions. In this below figure, producer would simply be ordered to reduce output to Q*. Regulation will be inefficient when there are different types of multiple firms. To see this, consider two firms, X, and Z, each of which creates pollution.

Possible Solutions Of Negative Externalities

Explanation Of The Figure:
In this figure, the output of the firms is measured on the horizontal axis and dollars on the vertical axis. MBx is the marginal benefits schedule for X and MBz the schedule for Z. For expositional ease only, X and Z are assumed to have identical MPC schedules and profit maximizing output X1= Z1

Suppose it is known that the marginal damage at each efficient level of total output is d dollars. Then efficiency requires that each firm produces where its marginal benefits curve intersects with the sum of its marginal private cost curve and d. The efficient outputs are denoted X* and Z* in this figure. The crucial observation is that efficiently does not require the firms to reduce their pollution equally. The efficient deduction in the production of Z exceeds that of X. Here this is due to different MB schedules, but in general, each firm’s appropriate reduction in output depends on the shapes of its marginal benefit and marginal private cost curves. Hence, a regulation that mandates all firms to cut back by equal amounts leads to so firms producing too much and others too little (Coase, 1960).

This analysis simply illustrates that the costs and benefits of pollution reduction are likely to differ from case to case.

Yale University, Economics.

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