1.8.4 Positive and negative externalities in consumption and production

• Positive externalities in consumption benefit third parties who do not participate in the market transaction.

  True
• Pollution from factories is an example of a negative externality in production
• Market failure occurs when market prices reflect the full social benefits or costs of externalities.

  False
• What is the impact of a negative externality on market outcomes?

  Socially suboptimal
• An externality in consumption occurs when the use of a good or service affects third parties who are not involved in the market transaction
• What is an example of a positive consumption externality?

  Education
• Externalities in production occur when the production activities of a firm impact third parties
• An externality occurs when the actions of producers or consumers impact third parties who are not involved in the market transaction
• Match the type of externality with its example:

  Positive externality in consumption ↔️ Vaccinations

  Negative externality in consumption ↔️ Smoking

  Positive externality in production ↔️ Research and development

  Negative externality in production ↔️ Pollution from factories
• Order the steps to explain a positive externality in consumption:

  1️⃣ Define positive externality

  2️⃣ Provide an example, such as vaccinations

  3️⃣ Explain how it benefits third parties
• A positive externality occurs when the actions of producers or consumers benefit third parties
• Positive externalities lead to socially suboptimal outcomes because the full benefits are not reflected in the market price.

  True
• Why do vaccinations provide a positive externality in consumption?

  Reduce disease spread
• Match the externality type with its impact on market outcome:

  Positive Consumption Externality ↔️ Underconsumption

  Negative Consumption Externality ↔️ Overconsumption
• How does research and development contribute to positive production externalities?

  Leads to innovations
• An externality occurs when the actions of producers or consumers affect third parties who are not involved in the market transaction
• Externalities cause market prices to reflect the full social costs or benefits.

  False
• Why is smoking considered a negative externality in consumption?

  Harms non-smokers
• What is an example of a positive externality in consumption?

  Vaccinations
• An externality in consumption occurs when the use of a good or service affects third parties
• What is the impact of a positive consumption externality like education on market outcomes?

  Underconsumption
• Positive consumption externalities lead to the underconsumption of socially beneficial goods.


  True
• Order the following types of production externalities based on their impact on third parties:

  1️⃣ Positive externality

  2️⃣ Research and development breakthroughs

  3️⃣ Negative externality

  4️⃣ Pollution from factories
• Negative externalities in production, such as pollution from factories, lead to overproduction
• How does bee farming create a positive production externality?

  Pollinates nearby crops
• Governments can use taxes, subsidies, regulations, and property rights to address externalities.

  True
• Subsidies are payments used to encourage activities with positive externalities
• A positive externality in consumption benefits third parties not involved in the market transaction.


  True
• What is the purpose of defining positive and negative externalities in this study material?

  To explain market failures
• An externality occurs when the actions of producers or consumers impact third parties who are not involved in the market transaction
• What is an example of a negative externality in consumption?

  Secondhand smoke from smoking
• What is an externality in consumption?

  When use of a good affects third parties
• What is an example of a positive consumption externality?

  Gardening in public parks
• What is an externality in production?

  When production affects third parties
• What is an example of a negative externality in production?

  Pollution from factories
• What are four methods governments can use to address externalities?

  Taxes, subsidies, regulations, property rights
• Subsidies encourage activities with positive externalities by reducing their cost
• Why do governments intervene to address externalities?

  To correct market failures
• What are the main methods governments use to address externalities?

  Taxes, subsidies, regulations, property rights
• Taxes reduce negative externalities by increasing the costs