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Divergence between Private and Social Costs
Definition of External Effect (Externality)
External Cost (Negative Externality or External Diseconomy)
An external cost, also termed a negative externality or external diseconomy, is a cost that an economic activity inflicts upon a third party without any compensating payment. This uncompensated negative impact, such as pollution, is not considered by the person or firm making the economic decision.
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Economics
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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Pigou's Rationale for Intervention in Case of Externalities
Private Cost (Definition)
Social Cost (Definition)
External Cost (Negative Externality or External Diseconomy)
External Costs in the Pest Control Game
Factory and Fishing Community Scenario
Identifying an External Effect
Analyzing Compensated vs. Uncompensated Effects
A factory's air pollution harms the health of nearby residents, but the factory does not pay for the associated healthcare costs or the reduction in quality of life. This uncompensated cost imposed on a third party is an example of a negative ____.
Chlordecone Contamination as an Example of an External Effect
External Cost (Negative Externality or External Diseconomy)
Which of the following scenarios best illustrates the concept of an external effect?
A technology firm offers free coding workshops to local high school students, which improves their job prospects. Because the firm does not receive direct payment from the students for this benefit, this is an example of an external effect.
The Dilemma of the Pest Control Game: Individual vs. Collective Rationality
Analyze each scenario and match it with the economic concept it best illustrates.
Analyzing a Business Scenario for External Effects
A company uses a robotic technology to produce olive oil. Each operational system requires exactly one worker and 400 kWh of energy to produce 100 liters of oil per day. If a worker's daily wage is $150 and the price of energy is $0.25 per kWh, what is the average cost to produce one liter of olive oil?
A chemical manufacturing plant's production process releases fumes into the air, which causes respiratory problems for residents in a nearby town. The plant's management team bases its production level decisions solely on its internal costs (labor, materials) and the market price of its chemicals. Which element of this situation is the clearest example of an external effect?
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External Cost in the Robot Factory Scenario
A large commercial farm uses a new, powerful pesticide to increase its crop yield and profits. The pesticide runoff contaminates a nearby river, killing a significant portion of the fish population that a local community relies on for food and tourism. Which of the following represents the external cost in this scenario?
Community Music Festival Scenario
Airport Noise Scenario
A technology company develops a new, more efficient manufacturing process that significantly lowers its production expenses. A side effect of this process is the release of a harmless but foul-smelling gas, which causes a nearby bakery to lose customers who are put off by the odor. In this scenario, the money saved by the technology company on its production expenses represents the external cost.
A company operates a large-scale data center. The company pays for the massive amount of electricity needed to run its servers and for the water it draws from a local river for its cooling systems. This cooling process releases heated water back into the river, which harms the native fish population and negatively impacts local fishing businesses that depend on the river. Which statement accurately distinguishes between the company's private costs and the external costs of this operation?
A new chemical manufacturing plant is built near a river. The plant provides jobs and produces a valuable product. However, it also discharges a small amount of untreated waste into the river, which harms the local fish population and makes the water unsafe for swimming. Match each element of this scenario to its correct economic description.
Analyzing Costs of Urban Commuting
When the total cost to society for the production of a good is greater than the direct costs paid by the producer, the difference is known as a(n) ____.
A logging company is considering two methods for harvesting timber in a forest adjacent to a popular public park.
- Method 1: Clear-cutting, which is the most profitable method for the company but leads to soil erosion that damages a nearby river and spoils the scenic views from the park.
- Method 2: Selective logging, which is less profitable for the company but preserves the forest structure, minimizes soil erosion, and maintains the park's scenic beauty.
Which of the following statements best analyzes the economic situation described?
Analyzing the Societal Costs of a New Transportation Service
The Weevokil Pesticide Model: A Case of Negative Externality