IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two terms and (2) the relationship between them.
-Public investment,externality

Question

Quizplus · Accepted Answer

The Answer is Public Investment:
Public investment refers to the expenditure by the government on capital goods that can provide long-term benefits to the public. This includes infrastructure projects like roads, bridges, schools, hospitals, and public transportation systems. Public investment is significant because it can lead to economic growth, improve the quality of life for citizens, and enhance the productivity of a nation. It is often funded by government revenues, such as taxes, or through borrowing.

Public investment is crucial for providing essential services that the private sector may not adequately supply due to the lack of profit incentive. It can also help to stimulate the economy during periods of low private investment or economic downturns by creating jobs and increasing demand for goods and services.

Externality:
An externality is a cost or benefit that affects a party who did not choose to incur that cost or benefit. Externalities can be positive or negative. A positive externality occurs when an individual or firm's actions result in benefits to others for which the others do not pay, such as the pollination of surrounding crops by bees kept for honey. A negative externality occurs when the actions of an individual or firm impose costs on others, such as pollution from a factory that affects the health of nearby residents.

Externalities are significant because they represent a market failure where the price of a good or service does not fully reflect the true costs or benefits to society. This can lead to overproduction in the case of negative externalities or underproduction in the case of positive externalities.

Relationship between Public Investment and Externality:
The relationship between public investment and externality is that public investment can be used to address externalities. For example, a government may invest in public transportation to reduce traffic congestion and air pollution, which are negative externalities of private car use. By doing so, the government can improve social welfare by internalizing the external costs.

Similarly, public investment in education creates positive externalities by increasing the overall education level of the population, which can lead to a more skilled workforce, higher productivity, and economic growth that benefits society as a whole.

In summary, public investment can be a tool for governments to correct market failures caused by externalities, ensuring that the social costs and benefits are taken into account in the provision of goods and services. This can lead to a more efficient allocation of resources and a better outcome for society.