Chapter 74, Problem 1CYU

a)

To determine

The reason why the problem is considered an externality problem when wastewater runoff from large poultry farms adversely affects residents in neighboring homes.

Explanation of Solution

This is an externality problem when wastewater runoff from large poultry farms adversely affects residents in neighboring homes because the cost of waste-water runoff does not apply to farms' neighbors without compensation. Moreover, there is no other solution or way for the farm to internalize this cost.

Economics Concept Introduction

Introduction: Externality problems refer to the fundamental economic policy problems while firms do not internalize the indirect costs or indirect benefits from any of their economic transactions in the market.

b)

To determine

The efficiency of the outcome with neither government intervention nor a private deal when wastewater runoff from large poultry farms adversely affects residents in neighboring homes.

Explanation of Solution

As poultry farmers do not concentrate on the external cost of their actions in their decision-making processes such as deciding on the quantity of wastewater that will be generated and they may produce more runoff as compared to socially optimal.

Due to the runoff point at the marginal social benefit of an extra unit where runoff is zero their neighbors would have a high and positive level of the marginal social cost of runoff from the level of output, which means the quantity of wastewater runoff is not efficient. And, it is a reducing runoff by one unit that would decrease the total social benefit by less than its reduction of total social cost.

Economics Concept Introduction

Introduction: Externality problems refer to the fundamental economic policy problems while firms do not internalize the indirect costs or indirect benefits from any of their economic transactions in the market.

c)

To determine

The way through which socially optimal outcome is determined and compared with the no-intervention, no-deal outcome when wastewater runoff from large poultry farms adversely affects residents in neighboring homes.

Explanation of Solution

When wastewater runoff from large poultry farms adversely affects residents in neighboring homes, then the marginal social benefit would be equal to the marginal social cost at the socially optimal quantity of wastewater runoff. Therefore, the quantity of wastewater

runoff that would be created in the absence of government intervention or a private deal would be greater than this level of quantity.

Economics Concept Introduction

Introduction: Externality problems refer to the fundamental economic policy problems while firms do not internalize the indirect costs or indirect benefits from any of their economic transactions in the market.