1. (an undesirable / a desirable) social side.... 2. (costs / benefits) on peopl
ID: 1112564 • Letter: 1
Question
1. (an undesirable / a desirable) social side....
2. (costs / benefits) on people.....
3. (benefits / costs) product.
4. (over produced / under produced) when we....
5.(too high / too low)
6. (decrease / increase) their production....
7. (over-allocation / under-allocation) of....
Consider the following dialogue between Dina, an Economics student, and Charles, a teaching assistant in her class. DINA: Hi, Charles, before I begin my homework assignment on externalities, I would like to ask you a few questions. What is an externality, and what is the difference between a negative externality and a positive externality? CHARLES: An externality is either a negative or a positive social side effect that occurs whenever a good or service is produced or consumed. This is why externalities are often referred to as "spillovers;" these undesirable or desirable side-effects spill over on to society. Let's see if you understand the basic difference between negative and positive externalities based on what you know now. For example, a negative externality is an undesirable social side effect that occurs whenever a good or service is produced or consumed because these products impose costs on people other than the buyers and sellers directly involved in the market transaction. A product that has an external cost is sometimes called a spillover cost product. These products are overproduced when we consider the negative externalities that accrue to society and, therefore, the equilibrium quantity produced in the market is too high. Government should take steps to decrease their production and consumption to correct for the over-allocation of the nation's scarce resources devoted to their production. What about a positive externality? DINA: A positive externality is social side effect that occurs whenever a good or service is produced or consumed because these products imposeon people other than the buyers and sellers directly involved in the market transaction. A product that has an external benefit is sometimes called a spillover accrue to society and, therefore, the equilibrium quantity produced in the market is production and consumption to correct for theof the nation's scarce resources devoted to their production. product. These products are when we consider the positive externalities that . Government should take steps to their CHARLES: Do you have any other questions, Dina? DINA: I have just one more general question.How can public policy correct for the allocative inefficiencies associated with externalities?Explanation / Answer
DINA:
A positive externality is a desirable social side effect that occurs when products are produced, because these products impose benefits on people other than buyers and sellers directly involved. A product that has an external benefit is called a spillover benefit product. These products are Under-produced when we consider the positive externalities that accrue to society, and therefore equilibrium quantity in the market is too low. Government should take steps to increase production and consumption to correct for the under-allocation of nation's scarce resources.
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