Positive/Negative Externality Definitions:
– Negative externalities arise when the production or consumption of a good creates a cost to a third party.
– Positive externalities arise when the production or consumption of a good creates a benefit to a third party.
– A third party is any individual or group other than the producer or consumer of the good.
Positive/Negative Externality Examples & Explanation:
When you eat a beef steak or some tuna, you are the supporting the negative externality involved in producing these foods. The large amount of tuna overfishing to produce canned tuna or sushi, causes the species to be endangered. As a result, it disrupts the food chain and depletes a source of protein for coastal communities (cost to third party). Hence there is a negative production externality in tuna production. Similarly, large amounts of methane is emitted when raising cattle to produce beef. Methane contributes to global warming and climate change disasters, incurring a cost to third parties. Externalities are a type of market failure as it disrupts the usual operation of the market mechanism, which maximises consumer/producer surplus but does not take into account third parties. As a result, the government may have to intervene in the market to reduce the third party cost e.g. stop overfishing through regulation.
Positive/Negative Externality Notes with Diagrams
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Oh and don’t eat big macs or junk food too. Eating junk food regularly affects your health which represents a third party cost to the health services provided by the government. This means the (marginal) private benefit for junk food consumption (i.e. utility gains from their spectacular taste), is higher than the (marginal) social benefit (i.e. net welfare to society). As a result, there will be a negative consumption externality affecting third parties (taxpayers and the National Health Service) when junk food is consumed, and society would like us to consume less.
The left video explains negative production/consumption externalities, the right explains positive consumption externalities.
Positive/Negative Externality Multiple-Choice Questions (A-Level)
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