Question

Suppose that the government decides to start regulating use of its forests, charging anyone who wants to log. Which of the following ways of calculating the price to charge for each acre will lead to an efficient quantity of logging?a. The sum of the marginal social value of each acre to all logging companies. b. The average price citizens say they would be willing to pay for an acre. c. The external cost that logging an acre imposes on all citizens.

Answer 1

Answer:

The optimal or socially efficient level of logging would imply a price charged for each acre of logging area equal to any external cost imposed on the citizens due to such activity.Hence,the correct answer would be option c. in this case.

Explanation:

To understand external cost or cost of externality,it is first helpful to understand the meaning of externality.In economic context,externality refers to any collateral or supplementary or additional impact of any economic or commercial activity that may be intended or unintended. Externalities can be positive or negative.A positive externality involves any positive or good impacts of any economic activity such as obtaining private education which not only helps the individual pursuing education but also indirectly or implicitly benefits the rest of the society,which is mostly unrecognized.In contrast,a negative externality refers to a negative or bad impact of any economic or commercial activity such as industrial pollution created by manufacturing industries which can harm the adjoining communities and local people residing close to the factories.In this instance,logging activities basically involve cutting down trees that can cause higher environmental pollution and other problems such as landslides or frequent floods,which can extensively impact the local people and communities residing close to the forest areas.Hence,in this case,logging activities can create uncompensated negative externality for the local people.Therefore,the government can charge a price of logging to the potential loggers which can compensate for any loss or cost incurred by the local communities caused by the negative externality due to logging.