Question

State whether each of the following primarily causes an external cost or an external benefit. \([\mathrm{LO} 18.1]\) a. Fishing at a popular lakeside vacation spot. b. Buying a fax machine. c. Conducting research to find an AIDS vaccine. d. Occupying a seat on a bench in a crowded park. e. Littering f. Spaying or neutering your pet.

Short answer

a. External cost; b. External benefit; c. External benefit; d. External cost; e. External cost; f. External benefit.

Step-by-step solution

Analyze Fishing at a Popular Lakeside Vacation Spot

Fishing at a popular lakeside vacation spot can contribute to overfishing, leading to depletion of fish stocks and affecting biodiversity. This impacts future fishing opportunities and the ecosystem, which is an external cost.

Analyze Buying a Fax Machine

Buying a fax machine creates an external benefit. This is because having a fax machine increases the network of people who can send and receive faxes, making it more valuable for everyone using the technology.

Analyze Research for AIDS Vaccine

Conducting research to find an AIDS vaccine generates an external benefit. The development of a vaccine would improve public health, reduce healthcare costs, and benefit society by lowering disease transmission rates.

Analyze Occupying a Seat on a Park Bench

Occupying a seat on a bench in a crowded park typically creates an external cost, as it prevents others from using the seat and contributes to congestion in a public space.

Analyze Littering

Littering results in an external cost because it degrades the environment, increases cleanup costs for the community, and poses health risks, all of which negatively impact society as a whole.

Analyze Spaying or Neutering Your Pet

Spaying or neutering your pet provides an external benefit by helping control the animal population, reducing the number of stray animals, and minimizing public health risks associated with stray animals.

Key concepts

External Costs

External costs, also known as negative externalities, occur when a decision or activity imposes costs on third parties who did not choose to incur those costs. This is a common occurrence when the actions of individuals or businesses have adverse effects on the environment or community.

For example, overfishing at a popular lakeside vacation spot can lead to depletion of fish stocks. This represents an external cost as it harms local biodiversity and future fishing opportunities, affecting those who rely on the lake for livelihood or recreation. Similarly, littering causes environmental degradation and increases clean-up costs from public budgets, which constitutes another form of external cost.

It is important to address these issues, as they can lead to resource depletion and ecological damage. Authorities may need to step in with regulations or penalties to internalize these costs to the responsible parties.

External Benefits

External benefits, or positive externalities, are the advantages that accrue to third parties as a result of an individual's or firm's activities without them being compensated. These benefits contribute positively to the overall welfare of society.

Buying a fax machine, for instance, is an action that generates external benefits. Once more people own fax machines, the network's usefulness increases, not just for the owners but for others who communicate with them. Similarly, conducting research to find an AIDS vaccine offers tremendous external benefits. A successful vaccine can improve overall community health, reduce medical expenses, and help control disease outbreaks, thereby benefiting society.

Recognizing these benefits can inspire policies and incentives to encourage actions that lead to positive externalities, thereby enhancing communal well-being.

Public Goods

Public goods are special types of goods that are non-excludable and non-rivalrous, meaning that individuals cannot be effectively excluded from using them, and one person's use does not reduce availability to others. Because of these characteristics, public goods often lead to market failures due to underproduction or lack of provision by the market.

Consider the shared use of park benches in a crowded park. Although occupying the seat provides private enjoyment, it can lead to congestion, which affects others who might want to use the benches. Such congested public spaces can benefit from government intervention or regulation to manage their proper use, ensuring such goods remain available for community enjoyment.

Market Failure

Market failure refers to a situation where the allocation of goods and services is not efficient, often due to the presence of externalities or the inability of a market to provide public goods. External costs and benefits can highlight these inefficiencies.

A clear example of market failure is illustrated by activities like littering and its subsequent environmental impact. Since individuals might not bear the full cost of their littering, they have little incentive to avoid doing it, leading to an inefficient outcome that deteriorates public spaces.

In response, effective public policies and legal frameworks are essential to correct these market failures. These include creating taxes or subsidies to internalize externalities, or public production of goods to ensure efficient provision and utilization.