Write short notes on types of externalities and their implication

Answer 1

Externalities are economic side effects of production or consumption that affect third parties not directly involved in the transaction. They can be either positive or negative.

Positive externalities: Positive externalities occur when the production or consumption of a good or service generates a benefit to a third party not directly involved in the transaction. Examples include the benefits of education, public health, and public safety.

Negative externalities: Negative externalities occur when the production or consumption of a good or service generates a cost to a third party not directly involved in the transaction. Examples include pollution, traffic congestion, and noise pollution.

The implications of externalities are that they can lead to market failure, as the costs or benefits of production or consumption are not taken into account by the market. This can lead to inefficient allocation of resources, as the market does not take into account the external costs or benefits of production or consumption. Governments can intervene to correct for externalities, such as through taxes, subsidies, or regulations.