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External Costs in the Pest Control Game
An example of an external cost occurs in the pest control game when Bala chooses the 'Toxic Tide' pesticide while Anil chooses IPC. Bala's choice is optimal for her own payoff, but in making it, she disregards the negative financial impact (an external cost) that her action inflicts upon Anil.
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Economics
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Introduction to Microeconomics Course
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CORE Econ
Ch.4 Strategic interactions and social dilemmas - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
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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?
Learn After
A coffee shop plays loud music that can be heard in the adjacent bookstore. The music attracts customers to the coffee shop, increasing its profits, but it distracts the bookstore's customers, causing the bookstore's sales to decrease. The coffee shop owner decides to continue playing the loud music. Based on the concept of external costs, which statement best explains the coffee shop owner's decision?
Upstream Decisions, Downstream Consequences
The 'Unrealistic' Nature of Economic Models
Analyzing Payoffs and External Costs
Analyzing Payoffs and External Costs
Consider a situation where an individual's action creates a negative financial impact on another person. The individual making the decision will logically choose to stop their action as soon as the negative financial impact they impose on the other person exceeds the personal benefit they gain from the action.
Match each scenario with the economic effect it best illustrates. Each effect is used only once.
Factory Emissions and Laundry Costs
A factory can choose between two production methods. Method A costs the factory $10,000 and creates waste that pollutes a nearby river, causing $4,000 in damages to a local fishery. Method B costs the factory $12,000 but has no polluting effects. The factory, aiming to maximize its own profit, chooses Method A. Which statement best explains the factory's choice?
Farmer's Pesticide Choice