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Explain and illustrate the concept of externalities.
Member rating: No Rating | Words: | Submitted: Mon Dec 22 2003
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Q. Explain and illustrate the concept of externalities EXTERNALITIES 'An externality arises when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect' .In the presence of externalities it is not only the well being of buyers and sellers, but also the well-being of bystanders which affect the market outcome.' There are 4 types of externalities - positive production externality, negative production externality, positive consumption externality and negative consumption externality. I will try to explain all of them in more detail below. Negative Production Externality. Firms that are involved in making for example paper are also involved in making a chemical called dioxin (not because they want to, but because its impossible to make paper without producing this chemical). And it has been proven by scientists that once dioxin enters the environment it increases the chance of people getting cancer,...
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