Question

(a) In 4 or 5 sentences, explain why can we expect companies in the private sector (if left alone) to generate pollution?

(b) Give one real life specific example of an actual company polluting the environment. Explain what this pollution is and who is hurt by it.

(C) When positive externalities exist, a deadweight loss is created. In one or two paragraphs, please explain why a deadweight is created when positive externalities exist and what this deadweight loss represents.

Answer 1

a)

Private companies do not take responsibility to bear the cost of pollution they generate. They do not take into account the negative external cost of pollution generated from their production activities, which undermines its marginal cost and thus lead to output level greater than the socially optimal level of output.

This makes private companies to generate pollution if left alone without regulation.

b)

One example is a dye industry factory set up along a riverside.

It generates a lot of water pollution by releasing its residual waste into the river.

The people living by the riverside who use the water for consumption purposes are hurt the most by this pollution because they will now be consuming polluted water and get ill.

c)

In case of positive externalities, the external benefit from production or consumption of the good is not taken into account, which leads to underproduction or underconsumption of good. That is, the output produced is less than the socially optimal level of output. This deviation of output actually produced from its optimal level is known as deadweight loss.

This deadweight loss represents underproduction or underconsumption in case of positive externaltiies.