a) What is the difference between a positive externality and a negative extarnality?

b) Give three examples of negative externalities.

c) What divergences arise between equilibrium output and efficient output when negative externalities are present?

a.

The positive externality results in an external benefit to the third party. On the contrary, negative externality creates an external cost to the third party.

b.

i. Playing loud music that upsets your neighbor.

ii. The exhaust from vehicles which pollutes the environment and cause health risks.

iii. Carbon emissions during electricity generation pollute the environment endangering the health of individuals.

c.

In the presence of a negative externality, the equilibrium output exceeds the optimal output. This inefficiency exists because the market equilibrium reflects exclusively the private costs. In this scenario, the private cost is less than the social cost of the product.