Externalities are costs or benefits associated with consumption or production that are not incurred by the consumer or producer and are therefore not reflected in market prices. The cost or benefit of an externality remains external when falling to parties other than the buyer or seller.

Respond to the following:

• Describe some differences between a positive externality and a negative externality.
• Provide one example of a positive externality and a negative externality, respectively. Explain your reasoning.
• How could you solve your examples of externalities to attain market efficiency?
• Does the government need to intervene with externalities to effect market efficiency?