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Impracticality of Legal Compensation for Positive Externalities
Distinguishing Public Goods from Positive Externalities
Positive Externality Example: A Beautiful Garden
A well-kept private garden provides a positive externality by bringing pleasure to neighbors and passers-by. [1, 2, 3] However, it is not typically considered a public good because the owner, who pays for its upkeep, also enjoys a much greater personal benefit than any other individual. This example highlights the distinction between a general positive externality and a public good, where private benefits for the provider are usually low. Furthermore, arranging legal payment for the external benefit is impractical, as it would require a court to measure the value of pleasure for each passer-by. [4]
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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Positive Externality Example: A Beautiful Garden
Analyzing Legal Hurdles for External Benefits
A technology company develops a new, highly efficient data compression algorithm and releases it as open-source software, meaning anyone can use it for free. This new algorithm significantly speeds up internet services for millions of users globally. If the company were to try to legally compel a major internet service provider (ISP) that benefited from this free software to provide compensation, what would be the primary analytical challenge in court?
The Challenge of Valuing External Benefits
A law requiring businesses located near a new public park to pay a special tax to compensate for the positive externality of increased foot traffic would be straightforward to implement, as the exact increase in each business's revenue due to the park can be easily and precisely determined.
The Judicial Process for Positive Externality Compensation
Match each scenario involving a positive externality with the primary informational challenge that makes it impractical for a court to enforce compensation from the beneficiaries.
A beekeeper's hives pollinate a neighboring apple orchard, leading to a substantial increase in the orchard's fruit yield. The beekeeper decides to sue the orchard owner, seeking financial compensation for the benefit provided. What is the primary informational problem a court would face when trying to determine a fair compensation amount?
Evaluating a City's Compensation Proposal
A chemical company voluntarily spends millions on a new filtration system that cleans a polluted river, significantly improving the water quality. A downstream commercial fishing business, which did not contribute to the cleanup cost, subsequently experiences a 30% increase in its annual profits. The chemical company sues the fishing business, demanding a share of these increased profits as compensation.
Which of the following legal arguments presents the most significant and fundamental obstacle to the chemical company's lawsuit?
A city government wants to ensure a popular, privately-owned sculpture garden, which attracts tourists and benefits nearby cafes and shops, is well-maintained. They are considering two policies.
Policy X: Legally empower the garden owner to sue nearby businesses to claim a portion of any profits attributable to the garden's existence. Policy Y: Fund the garden's maintenance through a small, city-wide tax on all businesses and provide the owner with a fixed grant.
Which statement best evaluates the practicality of these two policies?
Positive Externality Example: A Beautiful Garden
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A homeowner invests considerable time and money to create an elaborate and beautiful front-yard flower garden on their private property. The garden can be easily seen and enjoyed by neighbors and people walking by. Which statement best analyzes the economic reasons why this garden exists and is maintained?
Evaluating a Community Subsidy Proposal
Distinguishing Economic Concepts
The Unenforceable Benefit
A homeowner's beautiful private garden, which can be enjoyed by anyone passing by, should be classified as a pure public good because the enjoyment it provides to others is both non-excludable and non-rival in consumption.
The scenario of a homeowner maintaining a beautiful private garden that is enjoyed by neighbors and passers-by involves several distinct economic elements. Match each element of this scenario to the most accurate economic description.
A homeowner maintains a beautiful garden, deriving significant personal pleasure from it, which also benefits neighbors who enjoy the view. If this homeowner sells the house to a new owner who has no interest in gardening and perceives the upkeep only as a cost, what is the most likely economic outcome regarding the garden, assuming no intervention from the neighbors?
The Neighbors' Dilemma
A homeowner maintains a beautiful garden, which provides a positive externality to the neighborhood. If the local government decides to offer a small subsidy to the homeowner for maintaining the garden, what is the most likely economic justification for this policy?
The Challenge of Valuing External Benefits