Question

1: A privately owned power plant generates electricity. It uses coal, labor and capital as inputs and produces air pollution in the form of particulate matter (PM) and greenhouse gases. PM causes local health problem while greenhouses gases contribute to global climate change. All inputs as well as the air pollution and climate change are associated with costs. Which of these costs does the power plant take into account? How do you call the different type of costs?

2: Which type of resource are fish in the ocean? Please explain your answer.

3: The government wants to build a dam. The dam provides water for a city but it also stops salmon from migrating to their spawning grounds. The salmon population is expected to go extinct as a result. The government knows the benefits of the dam but not the environmental costs. What are the costs of extinction of the local salmon population and how can you assess them?

Answer 1

1.

Costs taken into account = All monetary costs incurred = Price of coal, Price of labor, rental rate of capital

The other costs not taken into account = Cost inflicted on the soceity in the form of air pollution

These costs are called negative external cost of production.

2.

Fish in ocean is a common resource

This is because they are non excludable and rival in nature. One cannot exclude anyone from fishing the fish available in oceans, however as more fishes are caught, less are available in the ocean for others

3. Cost of extinction of local salmon population: Damage to environment (since salmon nurtures sea life), lower salmon fish available for consumption in future

Access them: Loss of wildlife cover, Increase in price of salmon, reduced supply of salmon