Question

What is an externality in economics? Explain how

a neighbor’s barking dog could be both a positive

and a negative externality.

Answer 1

It includes both external cost and external benefit. In other words, there can be negative or positive externality. In the case of negative externality, action of an economic agent creates cost for others. For example: Barking Dog creates noise in the society.

On the other hand, in the case of positive externality action of an economic agent create benefits for others for which it does not receive anything in return. For example: Barking dog protect neighbors from robbery.

. ) when dog barks because of no reason and you are sleeping then it has negative externality but when dog barks because thief enters your house will have positive externality