Question

With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be _______ than the socially optimal quantity. Which of the following generate the type of externality previously described? Check all that apply.

1) A microbiology lab has published its breakthrough in swine flu research.
2) Paolo has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season.
3) The city where you live has granted a permit to put a movie theater in your neighborhood, causing traffic jams at night and on weekends.
4) Your roommate Van has bought a bird that keeps you up at night with its chirping.

Answer 1

Positive externalities occur when the market equilibrium quantity is greater than the socially optimal quantity due to benefits not reflected in the market. Examples include breakthroughs in medical research and beautification through tree planting, which benefit society more broadly beyond the direct market transaction.

Step-by-step explanation:

With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be greater than the socially optimal quantity. The scenarios that generate the type of externality previously described, where the market fails to produce the socially optimal quantity of goods due to unaccounted external benefits or costs, include:In the presence of a negative externality, such as pollution, the market equilibrium quantity produced will be greater than the socially optimal quantity. This is because the market only considers private costs and benefits, while external costs are not accounted for. In this case, the market produces too much of the product, leading to an inefficient outcome.

Applying this concept to the given options, the type of externality described is present in the following situations:A microbiology lab has published its breakthrough in swine flu research (positive externality).Paolo has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season (positive externality)The other scenarios listed involve negative externalities, which are also examples of market failure, where the presence of external costs, like traffic jams or noise from a neighbor's pet, means that the market equilibrium quantity is higher than the socially optimal quantity.