Question

Identify the following situations as an example of a negative or a positive externality:

a. You are a birder (bird watcher), and your neighbor has put up several birdhouses in the yard as well as planting trees and flowers that attract birds.

b. Your neighbor paints his house a hideous color.

c. Investments in private education raise your country’s standard of living.

d. Trash dumped upstream flows downstream right past your home.

e. Your roommate is a smoker, but you are a nonsmoker.

Short answer

(a) Positive externality

(b) Negative externality

(c) Positive externality

(d) Negative externality

(e) Negative externality

Step-by-step solution

Concept : 

Negative externality :

A third-party cost is an expense suffered by a party as a result of a financial activity.

As a result, the first and second parties in those transactions are the producer and consumer, respectively, while the third party are any corporation, individual, or property owner that is indirectly affected.

Positive externality :

A third party receives a gain as a result of an economic transaction is considered as a positive externality.

A third party is any company, individual, or property owner who is harmed in some way.

(a) Explanation : 

A birdwatcher is considered a third party. As a result, a birdwatcher's enjoyment of the lovely sound of birds is considered a positive externality.

(b) Explanation : 

The negative externality of a neighbor's house painted in a dreadful color is that the ugly hue is perceived as an unsightly and shocking color.

Such a color will annoy the observer and will not provide a smoothing effect.

(c) Explanation : 

Private education investment will raise the country's level of living, which will be considered a positive externality because it will benefit third parties.

(d) Explanation :

The rubbish thrown upstream and flowing downstream directly near to the house will undoubtedly have an impact, with a bad outcome.

As a result, the outcome in this case will be negative externality.

(e) Explanation :

If your roommate smokes and you don't, there will undoubtedly be a negative externality. As a nonsmoker, he will become a passive smoker, indicating he will not smoke directly but will be affected by the smoke indirectly.

As a result, the outcome in this case will be negative externality.