Question

1. This week we talked about how a free market can achieve an efficient outcome when demand curves reflect total willingness to pay (WTP) for a good and supply curves reflect total social cost of producing the good. But those conditions are often not met, such as when production of the good creates negative externalities. If Farmer Ben produces apple cider and dumps his apple waste into the creek behind his barn, what negative externality might that create? Make up a particular individual who could be affected by the apple waste in the creek and tell me about the negative spillover.

Answer 1

Dumping of waste in the creek is an example of negative externality because it leads to marginal damage of the creek because waste is dumped in the creek which creates the problem of water pollution and also harms the creek or stram and also people who are dependent on the natural source of warer for drinking and other activities like catching fish or day to day activities. It increases cost for these people and thus leads to marginal social cost for people dependent on the stream = Marginal private cost + Marginal damage to these people.

Since the marginal social cost of apple cider production is greater than marginal private cost of apple cider production in the economy, thus, it creates negative externality for people on which it imposes this marginal damage with no direct involvement of these people in production of apple cider.