1.

What are externalities ?Give an example of a positive externality and its impact on welfare of the people.

Answer»

Externalities are the good and bad impact of an activity without paying the price or penalty for that. Example of a positive externality is when a beautiful garden maintained by Mr. X raises welfare of Mr. Y even when Mr. Y is not paying for it.

Impact of externalities is not accounted in the index of welfare in terms of GDP. To that extent , GDP as an index of welfare is an inappropriate index .It either Underestimates or overestimates the level of welfare.



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