Suppose the city of New Orleans discovered chemical compounds in its drinking water that may cause cancer. since New Orleans's drinking water comes from the Mississippi River, the source of these chemicals is the waste discharges of industrial plants upstream from New Orleans. This is an example of a. an external cost imposed on the citizens of New Orleans by the industrial plants upstream. b. a market failure where the market price of the output of these industrial plants does not fully reflect the social cost of producing these goods. c. an externality where the marginal social costs of producing these industrial goods differ from the marginal private costs. d. all of the above.

Step by step solution

01

Option A: External Cost

An external cost is a cost that is not borne by the producers or consumers of a good, but by third parties. In this case, the industrial plants upstream discharge waste, causing pollution in the Mississippi River. This pollution affects the drinking water of New Orleans, potentially causing cancer among its residents. Since the citizens of New Orleans are bearing this cost while not being involved in the production or consumption of the industrial plants' products, this is an external cost imposed on the citizens of New Orleans by the industrial plants upstream.

02

Option B: Market Failure

A market failure occurs when the market price of a good or service does not fully reflect the social costs or benefits associated with its production or consumption. In this case, the market price of the industrial goods produced by the plants upstream does not account for the adverse effects of their waste discharges on the drinking water and health of New Orleans residents. The social costs are not internalized by the market, leading to a market failure.

03

Option C: Externality

An externality occurs when the actions of a producer or consumer affect uninvolved third parties. In this case, the industrial plants upstream are producing goods that lead to the release of toxic waste into the Mississippi River, impacting the drinking water in New Orleans. The marginal social costs of producing these industrial goods, which take into account the potential disease burden on New Orleans residents, differ from the marginal private costs borne by the industrial plants themselves. This is an example of an externality where the marginal social costs and private costs differ.

04

Option D: All of the above

Based on the explanations and analysis provided in Options A, B, C, we can conclude that the given situation is an example of an external cost imposed on the citizens of New Orleans by the industrial plants upstream, a market failure where the market price of the output of these industrial plants does not fully reflect the social costs of producing these goods, and an externality where the marginal social costs of producing these industrial goods differ from the marginal private costs. Therefore, the correct answer is (d) all of the above.

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