![]() Since parties that create the externality aren’t compensated, they do not have any incentive to create more. That person would be a free rider since he would benefit from inoculations without incurring any cost. That one person could choose to abstain from receiving the shot since everyone else got inoculated, he can’t get the disease from the others because they can’t catch the flu. For example, assume everyone in a community, except one person, got a flu shot. The problem with positive externalities is that the people who create these advantages cannot charge the beneficiaries the beneficiaries can “free ride,” or benefit without paying. The people taking the action may also enjoy the additional benefits described above, but initiators of actions are not considered beneficiaries of externalities. In each of these cases, the people taking action are presumably not doing it for the sake of the community, but for their own purposes. There was an exchange between the doctor and the patient, but others also benefit. A person becomes inoculated against a disease, those around him benefit because they cannot catch the disease from him.The beekeeper’s transaction of purchasing bees ends up positively affecting parties who are not involved in the transaction. A person may keep bees for her own enjoyment, but gardeners in the area benefit because their flowers are pollinated.The homeowner’s neighbors benefit from a positive externality. A homeowner keeps his house maintained, the neighborhood benefits through higher home values.In the case of positive externalities, a transaction has positive side effects for non-related parties. The use of these resources, in turn, impacts the uninvolved parties. Transactions often require the use of common resources that are shared with parties are not involved with the exchange. Externalities occur all the time because economic events do not occur within a vacuum. Positive externalities are benefits caused by transactions that affect an otherwise uninvolved party who did not choose to incur that benefit. Use an example to discuss the concept of a positive externality.The ideal equilibrium quantity that reflects negative externalities is Qs, but firms may produce at Qp. Negative Externality: Graphically, negative externalities occur when social costs are lower than private costs, and firms produce more units than is socially optimal. ![]() As a result, producers will overestimate the ideal quantity of the good to produce. The private marginal costs are lower than societal marginal costs, which also capture the true costs of the negative externalities. In other words, the costs of production represent individual, or private, marginal costs. As a result, a product that shouldn’t be produced, because the total expenses exceed the return, are made because social costs were not considered. For example, when a firm decides to open up a new factory, it will not account for the cost that residents accrue by drinking water from a river the factory polluted. Production decisions are generally based on financial data and most social costs are not measured that way. ![]() The reason these negative externalities, otherwise known as social costs, occur is that these expenses are generally not included in calculating the costs of production. ![]()
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