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External Effect (Externality)
Internalizing an Externality
An externality is internalized when a decision-maker takes into account the external costs or benefits of their actions. For instance, if a single company were to own both a banana plantation using pesticides and a fishery harmed by the resulting pollution, it would naturally consider the pollution's negative financial impact on the fishery when deciding on pesticide use. This joint ownership would lead the company to weigh the profits from bananas against the losses in fishing, effectively making the external cost an internal one. The externality problem itself arises because such entities are typically under separate ownership.
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Social Science
Empirical Science
Science
Economics
Economy
Introduction to Microeconomics Course
CORE Econ
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Internalizing an Externality
Marginal External Cost (MEC) (Definition)
Negative Externality Example: Robot Factory and Nurses
External Effects as a Source of Social Dilemmas
Negative Externality (External Diseconomy)
Positive Externality (External Economy)
Missing Markets as a Cause of Externalities
Inadequate Property Rights as a Cause of Externalities
Consumption Externalities
An apple orchard operates next to a beekeeper. The bees pollinate the apple blossoms, which increases the orchard's fruit yield. The apple blossoms, in turn, provide nectar for the bees, which increases the beekeeper's honey production. Neither party pays the other for these services. Which statement provides the most accurate economic analysis of this situation?
Residential Development and Air Quality
Market Outcome of Uncompensated Costs
Match each scenario to the economic description that best characterizes the primary effect described.
Policy Evaluation for a Noise Externality
A large chemical company has a manufacturing division that releases pollutants into a river. Downstream, another division of the same company operates a fish farm, which suffers reduced yields due to the pollution. This situation is an example of a negative externality.
Arrange the following events in the correct logical sequence to illustrate how a negative production externality leads to an inefficient market outcome.
When an individual chooses to get vaccinated against a contagious disease, they not only protect themselves but also reduce the likelihood of transmission to others in their community. This uncompensated benefit conferred upon the community is an example of a ________.
Evaluating the Root Cause of a Shared Resource Problem
Analyzing Production Costs and Externalities
Marginal Private Cost (MPC) (Definition)
Learn After
A beekeeper's hives are located next to an apple orchard. The bees pollinate the apple trees, which increases the orchard's fruit yield. The apple blossoms provide nectar for the bees, which increases honey production. Initially, the beekeeper and the orchard owner operate as separate businesses and do not coordinate their activities. Which of the following scenarios best demonstrates a private action that leads to these effects being internalized?
Resolving a Pollution Dispute
Comparing Mechanisms for Internalizing an Externality
Economic Rationale for Pollution Reduction
The process of internalizing a negative externality, such as pollution from a factory, can only be achieved through direct government action like imposing a tax on the polluter.
Match each economic scenario with the correct description of how the external effect is handled.
Impact of a Corporate Merger on Production Levels
Effect of a Merger on Pollution Output
When two separately owned firms, a chemical factory that pollutes a river and a downstream fishing business harmed by the pollution, merge into a single company, the new combined entity will likely produce a _______ amount of pollution compared to when the factory operated independently.
A paper mill discharges chemical waste into a river, which significantly harms a downstream town's tourism industry that relies on fishing and boating. Which of the following policy actions is specifically designed to make the paper mill's managers include the cost of this harm in their operational cost-benefit analysis?