The supply and demand curves do a good job modeling the rela

The supply and demand curves do a good job modeling the relationship between price and quantity demand of a good. However externalities are not represented in these curves. Identify an externality that was not discussed in the book and explain how the cost or benefit of the externality is distributed to users (or if it is not identify that as well). How might (does) the government get involved to correct issues created by externalities?

Solution

We can give many examples. Externalility due to new vacancies for communicable diseases like SRAS is one of them. As more people take the vaccine there is less chance of communicating disease. Thus there is positive externality which is not captured by market mechanism. Thus other people do not pay for it though it gives them more protection. Only those taking vaccine pay for it. The govt can intervene by subsidising the production of vaccine.