Define "externality." Give an example of an external cost. Explain why resources will not be allocated efficiently if externalities are present. How can the problem of externalities be addressed?
What will be an ideal response?
An externality is a cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties external to the activity or transaction. An example of an external cost is air pollution. Firms do not take external costs into consideration when determining the profit maximizing output level. If external costs exist, then marginal cost is not a good measure of the cost to society of producing an additional unit of the product. Externalities can be addressed through government regulation or voluntary agreements among those affected by the externality.
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A farmer who has fixed amounts of land and capital finds that total product is 24 for the first worker hired; 32 when two workers are hired; 37 when three are hired; and 40 when four are hired. The farmer's product sells for $3 per unit and the wage rate is $13 per worker. The marginal revenue product of the second worker is
A. $24. B. $8. C. $9. D. $15.
The "zero sum" society is
A) a society that has reached its limit in population growth and has placed quotas on its birth rate. B) a society where the rate of growth of GDP minus the inflation rate equals zero. C) a society in which the fluctuations of GDP around the natural level of output sum to zero. D) a society with no productivity growth in which any additional good enjoyed by one person requires that something be taken away from someone else.
Special-interest legislation usually
a. has widespread benefits and costs b. has concentrated benefits and costs c. has concentrated benefits but widespread costs d. concerns the provision of public goods e. concerns the provision of private goods
Policies that make it more difficult to fire an employee likely lead to:
A. greater unemployment, because employers will be more hesitant to hire someone. B. greater unemployment, because employees will quit more often. C. less unemployment, because everyone will value their job more. D. less unemployment, because employers will not be able to fire as many people.