Definition Of Positive Externality And Negative Externality
Economics notes
Definition Of Positive Externality And Negative Externality
➡️ MEB is an acronym for Marginal External Benefits, which refers to the additional benefits that are generated by a particular economic activity beyond those that are enjoyed by the direct participants.
➡️ MEB can be seen as a form of positive externalities, as they are generated by an activity that is not necessarily intended to generate them. Examples of MEB include the increased employment opportunities created by a new business, or the improved air quality resulting from a new environmental regulation.
➡️ MEB can be used to inform policy decisions, as they can help to identify activities that generate positive externalities and should be encouraged. Additionally, MEB can be used to calculate the social cost of a particular activity, which can be used to inform the pricing of goods and services.
What is a positive externality in economics?
A positive externality is a benefit that is enjoyed by a third party as a result of an economic transaction between two other parties. For example, if a person installs solar panels on their home, the reduction in carbon emissions benefits the community as a whole.
What is a negative externality in economics?
A negative externality is a cost that is imposed on a third party as a result of an economic transaction between two other parties. For example, if a factory pollutes a nearby river, the cost of cleaning up the pollution falls on the community downstream.
How can the government address negative externalities?
The government can address negative externalities by implementing policies such as taxes or regulations that increase the cost of the activity that generates the negative externality. For example, a carbon tax can be imposed on companies that emit greenhouse gases, which would incentivize them to reduce their emissions. Alternatively, the government can use a cap-and-trade system, where companies are given a limited number of permits to emit pollutants, and can buy or sell permits on a market. This creates a financial incentive for companies to reduce their emissions, while also allowing for flexibility in how they achieve those reductions.