What divergences arise between equilibrium output and efficient output when (a) negative externalities and (b) positive externalities are present? How might government correct these divergences? Cite an example (other than the text examples) of an external cost and an external benefit.

a) In the presence of negative externalities, equilibrium output will be greater than efficient output. This is due to the fact that producers can produce at a lower price than efficient prices.

b) In the presence of positive externalities, the equilibrium output is less than the efficient output because the consumer is willing to pay a price equal to the marginal benefits.

The government might correct these differences through providing subsidies to the producers or the consumers and regulation, which requires companies to internalize their external costs or to tax externality until it becomes too expensive to bear the external costs of the companies. Equilibrium would thus be closer to the efficient output level.

An example of external cost is radiation from nuclear power plant.

An example of external benefit is Education