Question

1. Use an example of a negative externality arising due to COVID 19 to explain what is meant by a negative externality and how it affects the efficiency of markets. Draw a diagram to illustrate your answer.

Answer 1

Negtive externality occurs when economic activity by one individual reduces welfare for other people. During period of of COVID - 19, producers who are continuing production just to maximize their profit and not taking any precautionary measures will harm the society becuse this virus is spreading from community. Many workers are working in same place which raise the chance of getting affected. Negative externality result in socially optimum production level less than private efficient level which result in social welfare / deadweight loss of society of area of highlighted triangle A in the graph below.