Most of the time, product doesn’t carry the actual value to the consumer without affecting the well-being of bystanders. If it does so, it becomes externality. And, If the bystanders has been influenced either positively or negatively, it gets classified as “Positive and negative externalities”.
In reality, it is really difficult to believe that market always succeed in allocating resources efficiently. Actually, many a times, market fails to do so.
When the product fails to carry the actual value to the consumer and influences the wellbeing of bystanders or third party in positive or negative ways, it is called externalities. Or it results in market failure that need government interventions. Here, I’m going to discuss positive and negative externalities.
What does externality mean? How to define externality and market failure?
Simply, externality is a effect of a person or firm on the wellbeing of the bystanders or third party but neither pay for benefits nor receive anything for incurred losses.
Sometimes, bystanders receive indirect benefits of irrigation projects, road construction, canals, parks for which he or she doesn’t pay anything in return is called positive externality. Positive in the sense that such effect positively affect the wellbeing of bystanders or third party.
But, many a times, same bystanders receive losses in the form of pollution, industrial waste, noise, etc. for that he or she doesn’t receive any compensations is termed as negative externality.
Commonly, there are countless examples of externalities. Based on effects, economists classified them as positive and negative externalities.
Meaning and impacts of market failures
Sometimes but not always “Invisible hand” effect averts market failures without interventions.
Precisely, if the given market fails to allocate resources efficiently due to overdemand and undersupply, it is called market failures.
Furthermore, when the commodity fails to carry actual cost to the consumer in market, the extra cost may either be borne by bystanders or third party in the form of positive or negative externalities.
Here, prudent steps of authority in can make situation better without being worse.
Examples of positive and negative externalities
Liquor factory near water reservoir is a negative externality for neighbouring settlements. Or, Impacts of fly ash released from thermal power plant on the nearby farmers.
Invention of new technology or medicine is positive externality for many millions to improve standard of living.
A simple example of positive and negative externalities
Suppose, a multispeciality hospital is constructed along the national highway outside of main city. Its purpose is to provide quick access for critical patients without much traffic.
But, national highway means heavy traffic with sometimes unbearable sound for certain patients. Vulnerable patients have to bear it without any compensation. On the other hand, hospital authority is excited over the better performance as they expected.
At the same time, many survived patients appreciate the location of hospital. In this case, some are looser while many are gainers. Gainers do not pay anything for received convenience. And, looser do not receive any compensations for incurred mental agony.
Last words on positive and negative externalities,
So far, we have seen that it is bound influence the third party or bystanders while allocating resources or getting benifits of product or service.
Simply put, product in question doesn’t carry real or actual value to the consumer but with negative or positive effect on third party or bystanders.
In short, the product doesn’t carry actual value due to positive and negative externalities in the form of effects on bystanders.
Practically, it is not possible to recorrect all the negative effects and charge for positive benefits. So, a reasonable action plan by governments is necessary to ensure market functionality.
Solved Questions on positive and negative externalities
Here, I’m going to provide some useful solved questions on positive and negative externalities. Just take a look at them.
Q. 1 What does it mean by externalities?
Ans: Externalities is an effect of person or a firm on the wellbeing of bystander but neither pay for the benefits nor receive anything for any losses.
Simply, it shows the effect of someone or something in a positive or negative manner. But in return, that influencing thing doesn’t pay anything for any wrong done or doesn’t get benefited when it affect something positively.
Q. 2 Which are major types of externalities? Give some day to day examples?
Ans: On the basis manner of how someone or something affect consumers wellbeing there are two mahir types of externalities, that is positive and negative externalities.
Benefits of irrigation projects, road construction, canal and park etc affect people positively are some good examples of positive externalities.
On the other hand, dumping yard near residential area may affect people negatively. Flying ash released from thermal power plants may affect nearby farmers negatively. These are some examples of negative externalities.
Q. 3 What does it mean by market failure?
Ans: Market failure is a state or effect when commodity or product fails to carry actual cost to the consumer in the market. It happens when the market fails to allocate resources efficiently. It happens when someone other is getting affected positively or negatively by the given product.
This is all about the concept clarity of positive and negative externalities. It is the subject matter of microeconomics. In the next, article, I’m going to explain Elasticity and inelasticity.
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