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Chapter 5: Problem 2

What does it mean for a producer or consumer to internalize an externality? What would cause a producer or consumer to internalize an externalitv????

Short Answer

Expert verified
To internalize an externality means that a producer or a consumer takes into consideration the wider costs or impacts of their production or consumption activities. They may do this due to legal requirements, social pressure, or due to their own moral or ethical beliefs.

Step by step solution

01

Understanding the Concept of Externalities

Externalities are termed as the costs or benefits that affect a party who did not choose to incur those costs or benefits. Basically, they are the side effects of industrial processes that are not reflected in the cost of the products or services offered by the producer.
02

What does it mean to internalize an externality?

When we talk about a producer or a consumer internalizing an externality, it means that they take into account the wider impact of their production or consumption activities. Such as the cost to society due to pollution created in the process of production, it is added into the cost of the product or service. This means that they are acknowledging that their actions have wider impacts and are taking responsibility for them.
03

Reasons why producers or consumers would internalize an externality

There are various reasons why a producer or a consumer may choose to internalize an externality. Legal requirements: Government regulations might enforce producers to internalize the cost of pollution created by their production process. Social pressure: Consumers might choose to pay more for a product that is produced in a sustainable way due to societal expectations. Moral or ethical beliefs: A producer might choose to internalize an externality out of their own moral or ethical beliefs. They would do this by taking full responsibility for the costs their activities enforce on others.

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Most popular questions from this chapter

The merry-go-round in Ross Park, a public park in Binghamton, New York, was first installed in 1920 and has been periodically refurbished by the city in the years since. There is no entry fee to visit the park or to ride the merry- go-round. Is the merry-go-round a public good? Briefly explain.

A columnist for the Wall Street Journal argued that highspeed Internet connections are now a public good: "We're going to have to transition to the building of public infrastructure and away from the revolution being the domain of private enterprise. It's not enough for Google to roll out high- speed fiber to a handful of cities." a. In what ways is the infrastructure for high-speed Internet connections like automobile highways? In what ways is it different from highways? b. As of 2017 , private firms have constructed most of the infrastructure for high-speed Internet connections, while governments have constructed most highways. Is it still possible that the infrastructure for high-speed Internet connections is a public good despite this fact? Briefly explain. c. Do you agree with the columnist that we should think of the infrastructure for high-speed Internet connections as being like a public good? Is there any information you would need to know before deciding?

William Easterly in The White Man's Burden shared the following account by New York University Professor Leonard Wantchekon of how Professor Wantchekon's village in Benin, Africa, managed the local fishing pond when he was growing up: To open the fishing season, elders performed ritual tests at Amlé, a lake fifteen kilometers from the village. If the fish were large enough, fishing was allowed for two or three days. If they were too small, all fishing was forbidden, and anyone who secretly fished the lake at this time was outcast, excluded from the formal and informal groups that formed the village's social structure. Those who committed this breach of trust were often shunned by the whole community; no one would speak to the offender, or even acknowledge his existence for a year or more. What economic problem were the village elders trying to prevent? Do you think their solution was effective?

John Cassidy, a writer for the New Yorker, wrote a blog post arguing against New York City's having installed bike lanes. Cassidy complained that the bike lanes had eliminated traffic lanes on some streets as well as some on-street parking. A writer for the Economist disputed Cassidy's argument with the following comment: "I hate to belabour the point, but driving, as it turns out, is associated with a number of negative externalities." What externalities are associated with driving? How do these externalities affect the debate over whether big cities should install more bike lanes?

In recent years, companies have used fracking, or hydraulic fracturing, in drilling for oil and natural gas that previously could not be profitably recovered. According to an article in the New York Times, "horizontal drilling has enabled engineers to inject millions of gallons of high-pressure water directly into layers of shale to create the fractures that release the gas. Chemicals added to the water dissolve minerals, kill bacteria that might plug up the well, and insert sand to prop open the fractures." Experts are divided about whether fracking results in significant pollution, but some people worry that chemicals used in fracking might lead to pollution of underground supplies of water used by households and farms. a. First, assume that fracking causes no significant pollution. Use a demand and supply graph to show the effect of fracking on the market for natural gas. b. Now assume that fracking does result in pollution. On your graph from part (a), show the effect of fracking. Be sure to carefully label all curves and all equilibrium points. c. In your graph in part (b), what has happened to the efficient level of output and the efficient price in the market for natural gas compared with the situation before fracking? Can you be certain that the efficient level of output and the efficient price have risen or fallen as a result of fracking? Briefly explain.
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