Question

Elaborate the concept of Externalities with the help of a suitable example.

Hint:

Externalities can be positive (e.g., education, public goods) or negative (e.g., pollution, congestion). Understanding them helps in better policy-making.

Answer 1

Understanding Externalities: Externalities refer to benefits or harms that occur when one entity's actions impact another entity without direct compensation or penalty. Example: For example, a newly developed public park provides a positive externality by improving public health and aesthetics, even though residents do not directly pay for its maintenance.