What does it mean to say that an individual or a firm has internalized an externality?
What will be an ideal response?
Externalities are external costs or benefits that firms or consumers do not consider when making decisions. When incentives are altered such that an externality is taken into account, firms and individuals are said to have internalized the externality. So, for example, suppose I raise bees next door to your apple orchard. The bees pollinate your tress and so there is an externality. The externality will be internalized if I buy your orchard.
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Two firms, Industrio and Capitalista, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the table below. Both firms currently use process A, and each emits 4 tons of smoke per day. The government is considering two plans to reduce pollution: requiring both firms to reduce pollution by 25 percent or auctioning pollution permits. Each permit would entitle the owner to emit one ton of smoke per day. Without a permit, no smoke can be emitted. Process(smoke/day) A(4 tons/day) B(3 tons/day) C(2 tons/day) D(1 ton/day) E(0 tons/day) Cost to Industrio ($/day) $350$400$500$700$1,000 Cost to Capitalista
($/day) $225$250$290$400 $600If neither firm had any permits, Industrio would be willing to pay up to ________ for the right to emit 1 ton of smoke, and Capitalista would be willing to pay up to ________ for the right to emit 1 ton of smoke. A. $50, $50 B. $50; $25 C. $1000, $600 D. $300, $200
There are very few, if any, farms within the city limits of Chicago because
A) zoning laws have always prohibited them. B) the land under the city of Chicago is unfertile. C) Chicago is known for its butchers and freighters, not its farmers. D) the land is in extremely great demand for non-agricultural purposes.
According to the Taylor rule, if actual output is greater than the natural rate of output, then the Fed should
a. decrease inflation. b. increase interest rates. c. conduct open market sales. d. decrease interest rates. e. Both a and b
That an increasing number of jobs that do not pay enough to subsist on is ____ theory of poverty.
A. a conservative B. a liberal C. both a liberal and a conservative D. neither a liberal nor a conservative