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Questions
Define externalities. Give an example of negative externality. What is its impact on welfare?
Give one example of 'externality' which reduces welfare of the people.
What are externalities? Give an example of a positive externality and its impact on the welfare of the people.
Solution
An externality is a positive and negative impact on economic activity on the others without involving any price. For example, emissions from driving contribute significantly to global warming. This leads to poor air quality and it contributes to significant health problems. People who breathe in this polluted air are at a higher risk for asthma and damage to the reproductive system. Thus, it affects the health of the people, which in turn reduces the welfare of the nation.
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