Economists are fascinated with the notion of externalities – they arise in a number of settings. As we know externalities can be benefits or costs, and can manifest on either the supply or the demand side of the market. We are going to focus here on positive externalities. An example of a positive externality arising out of tree consumption appears at https://www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-surplus/externalities-topic/v/positive-externalities. Notice that what happens here is instead of a social cost (as is the case with pollution) there is a social benefit arising out of consumption. It is also positive there are positive externalities generated out of production, if there is a positive benefit on some producers somewhere in the economy caused by the production of good X. the idea of a positive production externality is completely counter to the idea of pollution which is most of the readings for the course. An example of a positive production externality is found here: https://www.youtube.com/watch? This example centers on the production of hydro-electricity. You may or may not believe the argument that hydroelectric power generation creates positive external benefits to society. The authors argue that the benefits arise out of safety (relative to coal burning and nuclear options) and the creation of recreation areas behind the needed dams.

Part A. deals with a positive production externality, Part B deals with a positive consumption externality.

A. Identify a positive externality in production via example, and if possible include a link to a source. You are allowed to “make one up” and not include a web link. Note: You are required to include a supply and demand graph in your answers.

1. Identify the impacted markets, where the externality arises and who is impacted by the externality. In the sample Kahn Academy video the externality arises in the “tree market” and the people impacted by the externality are also named. Include a supply and demand graph in your posting, i.e. displayed in your posting not only available with a link.

2. Discuss the difference between the best outcome for society and the best outcome for the involved individuals.

3. Create two reasonable polices that may be enacted to encourage the market to ‘not fail’. I.e. what structures or incentives/penalties might the government put in place to lead the market toward a socially optimal outcome. Show the impacts of each of the two policies graphically – best to use a changed version of your graph from the above question.

B. Identify a positive externality in consumption via example, and if possible include a link to a source. You are allowed to “make one up” and not include a web link, just be sure the work is yours. Note: You are required to include a supply and demand graph in your answers.

1. Identify the impacted markets, where the externality arises and who is impacted by the externality. In the pollution examples the externality arises in the market for a good being produced, where a by product of that production is pollution. The impacted parties are those who also consume (a dirtier) environment. Include a supply and demand graph in your answer.

2. Discuss the difference between the best outcome for society and the best outcome for the involved individuals.

3. Create two reasonable polices that may be enacted to encourage the market to ‘not fail’. I.e. what structures or incentives/penalties might the government put in place to lead the market toward a socially optimal outcome. Show the impacts of each of the two policies graphically – best to use a changed version of your graph from the above question.