Give an example of an externality that you have personally e

Give an example of an externality that you have personally experienced. What makes it an externality? Is it possible for the government\'s solution to market failure actually make the failure worse? Explain using examples.

Solution

Experience of foul smell in the environment due to effluent treatment plant of a nearby manufacturing setup is an example of externality. It is a personal experience, observed by myself. Since, it happens as a consequence of industrial / commercial activity to someone who is not related to the concerned firm.

Market failure is a phenomena where demand of products are not equal to the supply of products offered by producers. Here, equilibrium is not achieved. It seldom happens that government solutions make situations of market failure to worsen.

One such example is of setting a minimum wage rates of labor force in economy. Setting a minimum wage that is higher that ongoing market rate, causes producers to hire relatively lower number of employees. It causes increase in unemployment of labor force and social cost increases. Thus, government solution to improve the minimum wage rate backfires and market failure takes place.