Market Failure and Government InterventionWhich of the following options represent an ‘external cost’ and an ‘external benefit’ respectively? 'Burning crops' and 'recycling' 'Education' and 'tuition fees''Animal testing' and 'environmental pollution'✕ IncorrectFeedback:Recall the concepts of external cost and external benefit.'Cost of a product' and 'profit made by the seller'
Question
Market Failure and Government InterventionWhich of the following options represent an ‘external cost’ and an ‘external benefit’ respectively? 'Burning crops' and 'recycling' 'Education' and 'tuition fees''Animal testing' and 'environmental pollution'✕ IncorrectFeedback:Recall the concepts of external cost and external benefit.'Cost of a product' and 'profit made by the seller'
Solution
The concepts of 'external cost' and 'external benefit' refer to the indirect costs and benefits that are not directly accounted for in the price of goods or services.
An 'external cost' is a cost that is suffered by a third party as a result of an economic transaction. In a transaction, the producer and consumer are the first and second parties, and any bystander is the third party. If the bystanders affected by the transaction are not properly compensated, then the transaction may lead to a market failure.
On the other hand, an 'external benefit' is a benefit that is enjoyed by a third-party as a result of an economic transaction. They occur when consuming a good causes a benefit to a third party.
In the given options, 'Burning crops' and 'recycling' represent an 'external cost' and an 'external benefit' respectively.
'Burning crops' can be seen as an 'external cost' because it can lead to air pollution which affects the health of people who are not directly involved in the transaction. This cost is not accounted for in the market price of the crops.
'Recycling' can be seen as an 'external benefit' because it reduces waste and helps conserve natural resources, which benefits society as a whole. However, these benefits are not directly reflected in the price of the goods or services that are recycled.
Similar Questions
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