9. Private solutions to correct for externalities Consider the following scenari

Question

9. Private solutions to correct for externalities Consider the following scenario: Suppose that a chicken farm uses a nearby stream to dispose of the wastes released by its chickens. These wastes flow downstream into a lake that has become thick with algae and polluted due to the minerals in the waste matter. The local office of a nonprofit environmental organization collects enough donations to stop the farm's pollution. Which of the following types of private solutions to the externality of pollution has occurred in this case? O Moral codes and social sanctions Contracts O Charities O Integration of different types of businesses through merger or acquisition It's important to note that sometimes private solutions to externalities do not work. For example, this occurs when one party repeatedly holds out for a better deal. This describes the problem of

Explanation / Answer

9. (ii) Charities.

(In this case, the negative externality is directed by the non-profit environmental organization. Private donations permit the organization to get the government regulators to limit the pollution created by the chicken farm)

(ii) Breakdown in bargaining.

(The bargaining procedure can breakdown when one party repeatedly hold out for a better deal. This would break coordination between the two parties and triggers a sort of competition among them).

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