Question

This year (2015), Smith produced oranges significantly more compared to last year (2014). According to agricultural scientists and economists, it may be due to the fact that a number of kettle and livestock, owned by his neighbor, Jim, who crossed over the fence of orange orchards, increasing the amount of manure significantly in his orchards. It has been known that manure could serve as a valuable fertilizer since it provides many nutrients for crop and fruit production. However, too much manure can lead to nitrate leaching, accelerated level of eutrophication of lake and phosphors run-off, hurting the quality of local lakes, near which, approximately 100,000 million urban residents resides.

Discuss a negative and a positive externalities illustrated in the second paragraph of this article, and what types of economic problems will arise from them, and how can they be resolved using economic tools or policies?

Answer 1

The positive externality is increase in orange production due to manure of kettle and livestock. Here social marginal benefit is greater than private benefit and production is less than optimum. It can be resolved by giving more incentives for this positive externality

B The negative externality is pollution of Lake. Here social marginal cost is greater than private marginal cost.. It leds to too much pollution. To avoid it govt can give property rights of Lake to someone.