Question

9. Private solutions to correct for externalities

Consider the following scenario:

Suppose that a chicken farm uses a nearby stream to dispose of the wastes released by its chickens. These wastes flow downstream into a lake that has become thick with algae and polluted by the minerals in the waste matter. The local office of a nonprofit environmental organization collects enough donations to fund a campaign to stop the farm's pollution.

Which of the following types of private solutions to the externality of pollution has occurred in this case?

1. Moral codes and social sanctions

2. Contracts

3. Charities

4. Integration of different types of businesses through merger or acquisition

It's important to note that sometimes private solutions to externalities do not work. For example, this occurs when an excessive amount of time or money must be spent for parties to reach an agreement. This describes the problem of_________ (transaction costs/ a breakdown in bargaining/ property held in common)

Answer 1

3. Charities is the correct answer.

Nowadays many charities are established to deal with externalities. Such charities often include nonprofit organizations that are usually involved in actions connected with the protection of the environment and funded by private donations and sponsors. Charities are usually encouraged by the government through the tax system by allowing an income tax deduction for charitable donations.

4. It's important to note that sometimes private solutions to externalities do not work. For example, this occurs when an excessive amount of time or money must be spent for parties to reach an agreement. This describes the problem of transaction costs.

Transaction cost is the cost involved in reaching a solution to internalise an externality. so if an excessive amount is spend on solving an issue, the issue may remain unsolved.

Please upvote