Question

Nick owns a paint factory. The production of paint creates waste materials. Runoff from Nick's factory flows into a nearby creek, which kills many fish. Which of the following statements is true? O Nick's paint production does not have any negative externalities as it does not directly harm people. Nick's factory will have a marginal social cost that is less than the marginal private cost for any given quantity of paint production. O Nick's paint factory is economically efficient. O The runoff from the factory is a negative externality. Nick should be subsidised by the government to increase paint production.

Answer 1

The runoff from the factory is a negative externality.

In the case of negative externality, action of an economic agent creates cost for others. For example: Smoker causes cost for non smoker. In the above scenario, production of paint by the Nick kills the fish of the creek so create cost for the fishing industry.