Internalizing an Externality Through Unified Ownership: The Plantation-Fishery Case
When a single entity owns both the source of a negative externality (the banana plantations) and the affected party (the fisheries), the external cost is internalized. The firm's private costs now encompass the damage from the pesticide to the fish stocks. Consequently, to maximize its combined profits, this unified company would naturally reduce its output to the Pareto-efficient level of 38,000 tons, where its new, higher marginal private cost equals the market price of $400.
0
1
Tags
Library Science
Economics
Economy
Social Science
Empirical Science
Science
CORE Econ
Introduction to Microeconomics Course
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
Related
Analysis of Production Externalities and Market Inefficiency
A factory producing industrial solvents is located upstream from a popular fishing spot. The factory's production process releases a chemical byproduct into the river that, while not illegal, harms the fish population. The factory manager, aiming to maximize the company's profit, sets the production level where the market price of solvents equals the factory's own marginal cost of production. Which statement best analyzes the economic efficiency of this outcome?
Evaluating Economic Efficiency with External Costs
A company's decision to produce at the quantity where the market price equals its private marginal cost will result in a socially optimal allocation of resources, even if its production process imposes costs on third parties.
Match each economic term with its correct definition. These terms are used to analyze situations where a producer's activity imposes uncompensated costs on others.
Explaining Market Inefficiency with External Costs
An economist is analyzing a market where a factory's production pollutes a nearby river, harming a local fishery. The factory is a price-taker and maximizes its own profit. Arrange the following statements into the logical sequence that demonstrates why the factory's chosen output level is not socially optimal.
A chemical factory is a price-taker in the market for fertilizer, where the price is $100 per ton. The factory's production creates a negative externality for a downstream fishery, costing the fishery $20 for each ton of fertilizer produced. For the overall economic outcome to be efficient, the factory should operate at an output level where its own marginal cost of production is $____.
A leather tannery, operating in a competitive market, dumps waste into a river. This practice harms a downstream community that relies on the river for clean water. The tannery produces at the output level where the market price for leather equals its own marginal cost of production. An economist claims: 'From an economic efficiency standpoint, the tannery is producing the 'correct' amount of leather because it is responding perfectly to market price signals.' Which of the following statements provides the most accurate critique of this claim?
Analyzing Production Decisions with Negative Externalities
Pareto Inefficiency Example: Banana Plantations and Fishermen
Internalizing an Externality Through Unified Ownership: The Plantation-Fishery Case
Logging Operations and Water Purity
A chemical factory releases effluent into a river, which harms the fish population and reduces the profits of a commercial fishing company operating downstream. If the chemical factory's parent company purchases the fishing company, how does this merger fundamentally change the factory's decision-making process regarding its production level?
Internalizing a Noise Externality
True or False: If an airport operator purchases a nearby hotel that has been suffering from noise pollution, the new combined company will have a financial incentive to completely cease all night-time flights to maximize the hotel's profitability.
Evaluating Unified Ownership as a Solution for Externalities
Match each business scenario with the most likely economic outcome related to externalities.
A power plant releases warm water into a lake, which negatively affects the operations of a commercial fish hatchery located on the same lake. Initially, the power plant only considers its own production costs. If the power plant's parent company acquires the fish hatchery, how will this change be reflected in the power plant's cost analysis?
A paper mill's production process has a marginal private cost of $30 per ton of paper. For each ton produced, it releases pollutants into a lake that cause $15 worth of damage to a commercial fishing business operating on the same lake. If the paper mill's parent company acquires the fishing business, what will be the marginal cost of paper production from the perspective of the newly combined entity?
A power company that emits air pollutants buys a nearby commercial greenhouse, which has historically suffered from reduced crop yields due to the poor air quality. The primary reason the new, unified company would invest in expensive pollution-control technology is to demonstrate corporate social responsibility.
A manufacturing plant has a marginal private cost of $50 to produce one unit of its product. The production process creates air pollution that causes $10 of damage to the crops of an adjacent farm for each unit produced. If the manufacturing plant's parent company acquires the farm, the marginal cost of production for the newly unified company becomes $____.
Effect of a Merger on Pollution Output
Internalizing an Externality Through Unified Ownership: The Plantation-Fishery Case
Learn After
Strategic Acquisition Analysis: Chemical Plant and Farm
A leather tannery is located upstream from a popular fishing resort. The tannery's operations discharge waste into the river, which significantly reduces the fish population and harms the resort's profits. If the owner of the fishing resort decides to purchase the leather tannery, creating a single unified company, what is the most likely outcome for the tannery's production level and why?
Cost Internalization in a Unified Firm
Impact of Unified Ownership on Production Decisions
Impact of Unified Ownership on Production Decisions
True or False: A power plant that releases hot water into a river is purchased by a downstream fish farm that suffers from the warmer water. To maximize its new combined profits, the merged company will continue to operate the power plant at its original, pre-merger output level.
A large-scale pig farm is located upstream from a popular lakeside resort. Waste runoff from the farm pollutes the lake, reducing the resort's profitability. The owner of the resort then purchases the pig farm, creating a single, unified company. Match each description to the economic concept it represents in this scenario.
A steel mill's production process pollutes a river, which reduces the profits of a downstream commercial fishing business. The fishing business acquires the steel mill, forming a single, unified company. From the perspective of the unified company's profit maximization, how will the marginal cost of producing steel be viewed, and what will be the resulting effect on the steel mill's output?
Change in Managerial Objective after Merger
When a firm that generates a negative externality (like a polluting factory) is acquired by the firm that suffers the consequences (like a downstream fishery), the external cost is said to be __________, which incentivizes the new, unified company to reduce the externality-producing activity to maximize its overall profit.