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Chapter 18: Problem 1

A number of firms have located in the western portion of a town after single- family residences took up the eastern portion. Each firm produces the same product and in the process emits noxious fumes that adversely affect the residents of the community. a. Why is there an externality created by the firms? b. Do you think that private bargaining can resolve the problem? Explain. c. How might the community determine the efficient level of air quality?

Short Answer

Expert verified
The firms are creating a negative externality by emitting harmful fumes that affect the residents who didn't choose to bear this cost. Private bargaining may help but faces issues like coordination and fair representation. The community can determine the efficient air quality level by comparing the cost and benefits of different pollution levels.

Step by step solution

01

Understand the Concept of Externality

An externality is a cost or benefit that affects a party who did not choose to incur that cost or benefit. In this case, the firms produce a negative externality by emitting noxious fumes as a result of their manufacturing processes which adversely affect the residents of the town.
02

Identify the Externality

The externality created by the firms is the emission of noxious fumes which affects the quality of life for the residents in the east portion of the town, without them having any choice in the matter nor any direct compensation.
03

Private Bargaining and Potential Issues

Private bargaining between the firms and the residents could potentially resolve the issue. However, this would entirely depend on the willingness and ensuring fair representation of all affected parties. Coordination between all residents could be challenging, and companies might not fully compensate for the damage done.
04

Efficient Level of Air Quality

The community might determine the efficient level of air quality by estimating the costs and benefits of different levels of pollution. Efforts should be made to reduce pollution to the point where the cost of further reductions would outweigh the benefits. This could be done through town meetings, surveys, or hiring an external environmental analyst.

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Most popular questions from this chapter

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