Externalities can really mess up how well an economy works. They can be either positive or negative and both can cause something called market failure.
Negative Externalities: Imagine a factory that is polluting the air. This can make people living nearby sick or unhappy. The cost of this harm is often higher than what the factory is willing to take on. For example, if the factory makes 300, then the market is not working well.
Positive Externalities: Now think about education. When someone gets a good education, it helps not just that person but also the community. If a student’s education helps them earn $50,000 more, the benefits to society might be even bigger than that. Because of this, we might not invest enough in education.
In both situations, the government can step in. They might use things like taxes or financial support to help fix the problems and make everything work better.
Externalities can really mess up how well an economy works. They can be either positive or negative and both can cause something called market failure.
Negative Externalities: Imagine a factory that is polluting the air. This can make people living nearby sick or unhappy. The cost of this harm is often higher than what the factory is willing to take on. For example, if the factory makes 300, then the market is not working well.
Positive Externalities: Now think about education. When someone gets a good education, it helps not just that person but also the community. If a student’s education helps them earn $50,000 more, the benefits to society might be even bigger than that. Because of this, we might not invest enough in education.
In both situations, the government can step in. They might use things like taxes or financial support to help fix the problems and make everything work better.