Answer:
Externalities are effects on third parties that arise from the actions of parties that the third parties are not involved in. They can be positive (benefits) or negatives (cost).
1. This might arise if a firm producing pharmaceuticals dumps its waste in a river or pollutes the air.
A. External cost of production.
This is an external cost of production because the people who will use that water as well as the environment will suffer from the pollution dumped into the river and the air.
2. If a promising compound is discovered, this will lead to the publication of scientific papers on the compound; therefore, the research undertaken on the compound will lead to the identification of other useful avenues for research.
B. External benefits of production.
As a result of the discovery and production of this compound, other useful discoveries can be made as well so this is a benefit of production.
3. In addition to their effects on individual health, cigarette smoking and alcohol consumption may also have negative effects on the rest of society in terms of passive smoking and antisocial behavior, which are not compensated for in the private market.
C. External costs of consumption.
When cigarettes are consumed, they impart others through second hand and passive smoking primarily. This is therefore a cost of consumption.
4. Vaccines have a direct health benefit on others by reducing their chances of ill health, and they are not being compensated in the private market; therefore, these activities should be subsidized.
D. External benefits of consumption.
Vaccines reduce the chances of others getting sick so they are a positive externality which makes them a benefit.
