Question

Consider the following activities:i) smoking by individuals; (ii) toxic waste production by firms; (iii) research and development by a high - tech firm; (iv) individual vaccination against communicable illness. a). Is there an externality? If so, describe it, including references to whether it is positive or negative, and whether it is a consumption or production externality.b). If there is an externality, does it seem likely that private markets will arise that allow this externality to be internalized? Why or why not?

Answer 1

(I) smoking by people - contrary utilization externality. Utilization of cigarettes creates smoke which is unsafe for customer and individuals close to him. Private markets won't disguise this externality as market as of now overproduce in the event of negative externality.

(ii) dangerous waste creation by firms; negative creation externality. Poisonous waste is unsafe for individuals close to plant. Private markets won't disguise this externality as market as of now overproduce if there should be an occurrence of negative externality.

(iii) innovative work by a cutting edge firm - No externality is produced. Interest in R and D prompts advancement and lessening their expense of prodcution.

(iv) singular immunization against transferable sickness.- Positive utilization externality. Immunization spares individuals close to purchaser from the transmittable illness. Private markets will disguise this externality as market underproduce in the event of positive externality.