Chapter 12, Problem 1SCQ

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

1. 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.
2. Your neighbor paints his house a hideous color.
3. Investments in private education raise your country’s standard of living.
4. Trash dumped upstream flows downstream right past your home.
5. Your roommate is a smoker, but you are a nonsmoker.

To determine

(a)

Whether a birder will have a positive or a negative externality is to be determined.

Answer to Problem 1SCQ

Positive Externality

Explanation of Solution

Since a birdwatcher is regarded as a third party. So, the benefit of enjoying the sweet sound of birds is regarded as a positive externality for a bird watcher.

Positive externality: is defined as a benefit that is received by a third-party as a consequence of a transaction that is economic in nature.

The Third-parties include any organisation, individual, property owner that is indirectly affected.

Economics Concept Introduction

Negative externality:  is defined as a cost that is borne by a third party as a consequence of a transaction that is economic in nature.

So, in those transactions, the producer and consumer are regarded as the first and the second parties, and the third parties include any organisation, individual, property owner that is indirectly affected.

Positive externality: is defined as a benefit that is received by a third-party as a consequence of a transaction that is economic in nature.

The Third-parties include any organisation, individual, property owner that is indirectly affected.

To determine

(b)

Whether the house painted by your neigh borer with a hideous color will have a positive or a negative externality is to be determined.

Answer to Problem 1SCQ

Negative Externality

Explanation of Solution

The house of the neighbor painted with a hideous color will have a negative externality as the hideous color is regarded as an ugly and shocking color.

Such kind of color will irritate and will not give a smoothening effect to the onlooker.

Economics Concept Introduction

Negative externality:  is defined as a cost that is borne by a third party as a consequence of a transaction that is economic in nature.

So, in those transactions, the producer and consumer are regarded as the first and the second parties, and the third parties include any organisation, individual, property owner that is indirectly affected.

Positive externality: is defined as a benefit that is received by a third-party as a consequence of a transaction that is economic in nature.

The Third-parties include any organisation, individual, property owner that is indirectly affected.

To determine

(c)

Whether the investments in private education raise the country’s standard of living will have a positive or a negative externality is to be determined.

Answer to Problem 1SCQ

Positive Externality

Explanation of Solution

The investment in private education will increase the country’s standard of living- this will be regarded as a positive externality as it will bring its benefits to the third parties.

Economics Concept Introduction

Negative externality:  is defined as a cost that is borne by a third party as a consequence of a transaction that is economic in nature.

So, in those transactions, the producer and consumer are regarded as the first and the second parties, and the third parties include any organisation, individual, property owner that is indirectly affected.

Positive externality: is defined as a benefit that is received by a third-party as a consequence of a transaction that is economic in nature.

The Third-parties include any organisation, individual, property owner that is indirectly affected.

To determine

(d)

Whether the trash dumped upstream flows downstream right past your home will have a positive or a negative externality is to be determined.

Answer to Problem 1SCQ

Negative externality.

Explanation of Solution

The trash which is dumped upstream and flows downstream right next to the house will definitely affect and the effect will be negative.

So, in this situation the effect will be negative externality.

Economics Concept Introduction

Negative externality:  is defined as a cost that is borne by a third party as a consequence of a transaction that is economic in nature.

So, in those transactions, the producer and consumer are regarded as the first and the second parties, and the third parties include any organisation, individual, property owner that is indirectly affected.

Positive externality: is defined as a benefit that is received by a third-party as a consequence of a transaction that is economic in nature.

The Third-parties include any organisation, individual, property owner that is indirectly affected.

To determine

(e)

If your roommate is a smoker and you are a non smoker will have a positive or a negative externality is to be determined.

Answer to Problem 1SCQ

Negative externality.

Explanation of Solution

If your roommate is a smoker and you are a non smoker it will definitely have a negative externality. As the non smoker will become a passive smoke that is he is not smoking directly but indirectly the affect of that smoke will affect his lungs.

So, in this situation the effect will be negative externality.

Economics Concept Introduction

Negative externality:  is defined as a cost that is borne by a third party as a consequence of a transaction that is economic in nature.

So, in those transactions, the producer and consumer are regarded as the first and the second parties, and the third parties include any organisation, individual, property owner that is indirectly affected.

Positive externality: is defined as a benefit that is received by a third-party as a consequence of a transaction that is economic in nature.

The Third-parties include any organisation, individual, property owner that is indirectly affected.