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Is there any externality involved

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Problem: Suppose that utility function takes this form: U1 = f(y1) + U2, where 1 and 2 stand for different individuals, and y1 is the income of 1, f(y1)>0 whenever y1>0 and f(y1) increases with y1. Meanwhile, the utility function for 2 is U2 = y2, where y2 is the income of 2.

(a) Is there any externality involved? Please first explain the meaning of externality. Then, explain why the above form of utility satisfies or does not satisfy the conditions of externality

Reference no: EM132421893

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