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12 Sep 2024, 22:27
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Consumption, production, and investment decisions of individuals, households, and firms often affect people not directly involved in the transactions. Sometimes these indirect effects are tiny. But when they are large they can become problematic—what economists call externalities. Externalities are among the main reasons governments intervene in the economic sphere.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Based on the information in the passage, which of the following could be an example of an activity that results in negative externalities?
A. A company launches a new product that significantly reduces the cost of energy for consumers.
B. A homeowner installs solar panels on their roof, reducing their electricity costs.
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs.
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers.
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Based on the information in the passage, which of the following could be an example of an activity that results in negative externalities?
A. A company launches a new product that significantly reduces the cost of energy for consumers.
B. A homeowner installs solar panels on their roof, reducing their electricity costs.
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs.
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers.
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
12 Sep 2024, 22:27
Kudos
Bookmarks
Official Solution:
Consumption, production, and investment decisions of individuals, households, and firms often affect people not directly involved in the transactions. Sometimes these indirect effects are tiny. But when they are large they can become problematic—what economists call externalities. Externalities are among the main reasons governments intervene in the economic sphere.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Based on the information in the passage, which of the following could be an example of an activity that results in negative externalities?
A. A company launches a new product that significantly reduces the cost of energy for consumers.
B. A homeowner installs solar panels on their roof, reducing their electricity costs.
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs.
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers.
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
Correct Answer:
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
This is a classic negative externality: the company benefits from increased yields, but the water contamination harms others, and thus the cost of contamination is not attributed to the company.
Incorrect Answers:
A. This is a direct benefit with no harm to third parties.
B. This results in a direct benefit with no harm to others.
C. Increased productivity benefits businesses directly, with no negative effects on third parties.
D. This action does not have unintended harmful consequences affecting others. The increased fee results into fewer visitors, and thus potentially lower income for the park. There is no cost transfer from one entity to another.
Answer: E
Consumption, production, and investment decisions of individuals, households, and firms often affect people not directly involved in the transactions. Sometimes these indirect effects are tiny. But when they are large they can become problematic—what economists call externalities. Externalities are among the main reasons governments intervene in the economic sphere.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Based on the information in the passage, which of the following could be an example of an activity that results in negative externalities?
A. A company launches a new product that significantly reduces the cost of energy for consumers.
B. A homeowner installs solar panels on their roof, reducing their electricity costs.
C. A tech company develops an app that increases worker productivity, allowing businesses to reduce costs.
D. A public park increases its entrance fee, which leads to a reduction in visitor numbers.
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
Correct Answer:
E. A company introduces a new type of pesticide that increases crop yields but also contaminates nearby water sources.
This is a classic negative externality: the company benefits from increased yields, but the water contamination harms others, and thus the cost of contamination is not attributed to the company.
Incorrect Answers:
A. This is a direct benefit with no harm to third parties.
B. This results in a direct benefit with no harm to others.
C. Increased productivity benefits businesses directly, with no negative effects on third parties.
D. This action does not have unintended harmful consequences affecting others. The increased fee results into fewer visitors, and thus potentially lower income for the park. There is no cost transfer from one entity to another.
Answer: E
