Question

In each of the following situations, identify if there is a positive or negative externality in play. Explain you answer thoroughly.

A local bridal shop shares a strip mall with eight other businesses. Recently all have agreed that the signage at the road needs a facelift. Although all eight businesses use the sign, the other seven are not willing to pay for a fresh paint job. The bridal shop decides to foot the bill and, on their own, they update the sign. Is there a positive or negative externality in play?

Answer 1

Positive Externality

Step-by-step explanation:

Externalities are extra side effects to third un-involved party, without any monetary transaction for the same

Positive Externality is the positive side effect to third un-involved party, without any monetary transaction for the same. Negative Externality is negative side effect to third un-involved party, without any monetary transaction for the same.

The Local bride shop has only paid for the road signage facelift. Despite, all the seven other shops sharing strip mall with it also use the sign. This act of local bride shop will have more visibility & other benefits for all the other 7 businesses linked to it, who have not although paid for it. So, the other 7 businesses have a positive extra effect due to local bride shops' act. Hence it is a positive externality for all of them.