Question

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?A. Integration of different types of businessesB. ContractsC. Moral codes and social sanctionsD. Charities

Answer 1

Answer:

D

Explanation:

The activities of the chicken firm constitutes a negative externality to the environment

A good has negative externality if the costs to third parties not involved in production is greater than the benefits. an example of an activity that generates negative externality is pollution. Pollution can be generated at little or no cost, so they are usually overproduced. Government can discourage the production of activities that generate negative externality by taxation. Taxation increases the cost of production and therefore discourages overproduction. Tax levied on externality is known as Pigouvian tax.

Government can regulate the amount of externality produced by placing an upper limit on the amount of negative externality permissible

Coase theorem has been proposed as a solution to externality. According to this theory, when there are conflicting property rights, bargaining between parties involved can lead to an efficient outcome only if the bargaining cost is low

Another solution to negative externality is through the activities of charities. Charities can raise donations to limit or regulate the activities of firms that constitutes a negative externality. This is the solution employed here.