Environmental Externalities Quiz

'If markets operate without any regulation, the production decisions of companies will not account for the social and ecological damages of ________'

'Negative Externality negative impacts of a market transaction affecting those not involved in the transaction. Ex: ________'

'Consumers also typically will not limit their purchases because of ________ caused by the goods and services that they purchase'

'Positive Externality the positive impacts of a market transaction that affect those not involved in the transaction. Ex: A landowner who buys and plants ________'

'In addition to benefits to the owner, the trees provide benefits to those who appreciate the scenery and to society as a whole because they absorb carbon dioxide and provide habitat for ________'

Environmental Externalities

An externality is an effect of a market transaction that impacts the utility, positively or negatively, of those outside the transaction.
There are two types of externalities: negative and positive.

Negative Externality

A negative externality occurs when a market transaction has negative impacts on those not involved in the transaction.
Example: Pollution, which can lead to social and ecological damages.
Without regulation, companies may not account for the social and ecological costs of pollution in their production decisions.
Consumers may not limit their purchases despite the pollution caused by the goods and services they buy.

Positive Externality

A positive externality occurs when a market transaction has positive impacts on those not involved in the transaction.
Example: A landowner who buys and plants trees, providing benefits to:
- The owner themselves.
- Those who appreciate the scenery.
- Society as a whole, as trees absorb carbon dioxide and provide habitat for wildlife.