Question

Distinguish between positive externalities and negative externalities with suitable examples.

Hint:

Positive externalities lead to external benefits, while negative externalities create external costs. Both impact resource allocation and require government intervention.

Answer 1

Externalities are the unintended side effects (beneficial or harmful) of an economic activity that affect other parties not directly involved in the transaction. They are not reflected in market prices. 

Positive Externalities	Negative Externalities
Benefits that accrue to others as a result of an individual’s or firm’s actions.	Harms or costs imposed on others due to an individual’s or firm’s actions.
These increase social welfare and are under-provided by the market.	These reduce social welfare and are over-produced by the market.
Example: A farmer who grows organic vegetables benefits nearby residents with clean air and soil quality.	Example: A factory discharging polluted water into a river harms fishermen and nearby villagers.
Government may promote such activities through subsidies or incentives.	Government may discourage such activities through taxes or regulations.