Question

Give an example of a positive externality and an example of a negative externality.

Short answer

A positive externality example is vaccinations, which protect not only vaccinated individuals but also those who cannot or have not been vaccinated, leading to an overall decrease in the spread of the disease. This additional benefit experienced by the unvaccinated individuals is the positive externality. A negative externality example is air pollution caused by a factory, which negatively impacts the health of people living nearby and contributes to environmental issues. The factory does not bear the costs associated with these negative impacts, and the additional costs experienced by the affected parties represent the negative externality.

Step-by-step solution

Example of Positive Externality

For a positive externality, we can consider the example of vaccinations. When a large percentage of a population is vaccinated for a contagious disease, it can lead to what is called "herd immunity." This phenomenon protects not only the vaccinated individuals but also those who cannot or have not been vaccinated (e.g., infants, people with compromised immune systems). In this scenario, the benefits of the vaccination extend to the wider population, leading to an overall decrease in the spread of the disease. This additional benefit experienced by the unvaccinated individuals is the positive externality.

Example of Negative Externality

For a negative externality, we can consider the example of air pollution caused by a factory. A factory may produce goods for consumers, but in the process, it may also emit harmful pollutants into the atmosphere. These pollutants can have a negative impact on the health of the people living in the surrounding areas and contribute to environmental issues like smog, acid rain, and climate change. The factory doesn't bear the costs associated with these negative impacts, instead, they are borne by the affected individuals and the environment. This additional cost experienced by the unaffected parties is the negative externality.