Q 2 Suppose that repeated applicatio... [FREE SOLUTION]

Chapter 5: Q 2 (page 119)

Suppose that repeated application of a pesticide used on orange trees causes harmful contamination of groundwater. The pesticide is applied annually in almost all of the orange groves throughout the world. Most orange growers regard the pesticide as a key input in their production of oranges.
(a) Use a diagram of the market for the pesticide to illustrate the implications of a failure of orange producers鈥� costs to reflect the social costs of groundwater contamination.
(b) Use your diagram from part (a) to explain a government policy that might be effective in achieving the amount of orange production that fully reflects
all social costs.

Short Answer

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(a) The diagram

It will lead to a negative externality as the orange production fails which would ultimately lead to increase in price and reduction in quantity.

(b) The government could impose taxes on the orange producers for contaminating the groundwater

Step by step solution

Step 1. Define Externality.

An externality is a consequence of an economic activity that affects the third party. For example, pollution is an externality.

Part (a). The Diagram.

The diagram for the market for pesticides is,

The curves shown here are the marginal social cost curve, marginal benefit curve and marginal private cost curve. In the given figure equilibrium is attained when the marginal private cost curve intersects the marginal benefit curve because the marginal social cost includes the negative externality by the orange producers which reduces quantity and increases price.

Part (b). A government policy.

The government could impose taxes on the orange producers for contaminating the groundwater and the people who suffered from the externality should be compensated.