Question

3 Give an example of a positive and negative externality and what regulations the government would use to correct the negative externality?

Answer 1

A positive externality is when the third party benefit from the transaction between two party. For example, a person making a garden and cleaning whole backyard will benefit the neighbors as well. Government can provide subsidies for the good that are creating a positive externality in the market.

A negative externality is a situation where the third party is negatively affected for example an industry emmitting smoke affects the whole society. Government can charge them a tax to reduce the negative externality.