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An example of an externality is the impact of a
An example of an externality is the impact of
a. bad weather on the income of farmers.
b. the personal income tax on a person's ability to purchase goods and services.
c. pollution from a factory on the health of people in the vicinity of the factory.
d. increases in health care costs on the health of individuals in society.
Expert Solution
An example of an externality is the impact of c. pollution from a factory on the health of people in the vicinity of the factory.
The people who live near the factory are being subjected to harm that they did not cause. The market has failed to allocate the full cost of the production of the factory to the factory - instead, the people who live nearby are paying part of the cost. Government is likely to step in and regulate the pollution, creating a cost to the factory that makes the externality internal to the firm so that the firm is paying the full cost of its action.
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