Question

Which type of externality (Negative or Positive), if not internalized, result in a market producing too much output?

Give a real life examples.

Answer 1

Negative externality if not internalized results in a market producing too much of output. This is because in case of negative externality marginal private cost is lower than marginal social cost and thus if externality is not internalised, then over production of the good takes place above the socially efficient level of production. This can be seen in case of industries producing plastic and also pollutiong the rivers by emitting the waste in the rivers. This has marginal external cost on the fishing community. If taxes are not imposed on waste disposal of plastic, then over production of the good takes place. Thus, it is an example of negative externality.