What is an externality? How do positive and negative ...

[burchfield96]

What is an externality? How do positive and negative externalities differ in their effects? How can government action correct positive and negative externalities?
 
  What will be an ideal response?

Question 2

If psychological limitations and other complications cause people to be unable to examine and think through every possible choice available to them and rely instead on rules of thumb, then these individuals exhibit
 
  A) unbounded rationality.
  B) normative thinking.
  C) bounded rationality.
  D) positive thinking.

[huda]

Answer to Question 1

An externality is a cost or benefit of an economic activity that is borne by third parties. A good generating a positive externality is underproduced and underconsumed. A good generating a negative externality is overproduced and overconsumed. The government can correct a positive externality by either producing the good itself or by providing a subsidy equal to the external benefit, and can correct a negative externality by either imposing a tax equal to the external cost or by direct regulation.

Answer to Question 2

C

[burchfield96]

TYSM

[mohan]

Excellent