Question

This is the question: The lesson notes describe both positive and...

This is the question:

  1. The lesson notes describe both positive and negative externalities. An interesting situation occurs when there is a positive externality. This is interesting because economists state this is a result of market inefficiency or failure. Combine the lesson notes with some of your own research and your own experiences to describe when you were part of a transaction that resulted in a positive externality and why the transaction would be considered inefficient. To answer this question, a) describe the transaction, b) describe the positive externality, and c) state why, from an economist's viewpoint, this would be considered market inefficiency. (2 marks)

 

 This is my answer im just wonder if this is correct?


2a) We built our house a few years ago where there were quite a few smaller homes and during that time, more bigger homes in our community were building as well. The transaction is we decided to upgrade our landscape with a rock exterior, fencing, porch and an inground pool to increase market value.

 

2b) The positive externality is the neighbours with smaller homes will benefit from our renovations because it will bring up property value for our community. Even though the neighbours did not have any input into the renovations or did not pay for any costs they will benefit due to the likelihood of increased property value.

 

2c) The market inefficiency because the positive externalities of the neighbours did not receive any financial benefits.

Answer & Explanation
Verified Solved by verified expert

Hello,

Your answers in a and b are correct, however , your answer in c is partly correct.

Step-by-step explanation

Positive externality occurs when transaction creates benefits or cost  on someone who was not involved in the transaction.

 

a)Upgrading your landscape would make your neighborhood more pleasing , and this may lead to increasing of property value in the neighborhood.

b)As you rightly put it in your answer above, the positive externality is that the neighbors with small homes will benefit from the increased property prices even though they did not contribute towards costs of  upgrading your home; which is the reason for increased property value in the neighborhood.

c)It is market inefficiency because you do not capture the extra value upgrading of your home's landscape will create for other small homer owners in the price that you will receive for your home.