Question

Differentiate between positive externalities and negative externalities.

Hint:

Positive externalities lead to social benefits, while negative externalities result in social costs.

Answer 1

Positive Externalities: Positive externalities refer to the beneficial effects of an economic activity that affect third parties who are not directly involved in the activity. These benefits are unintended and can lead to social improvements. For example, the planting of trees may improve air quality for everyone in the area. Negative Externalities: Negative externalities are the harmful effects of an economic activity that affect third parties who are not involved in the activity. These costs are unintended and can result in environmental degradation or health risks. For example, pollution from factories may negatively affect the health of nearby residents.