Question

Recently, the State of Tennessee discovered chemical compounds in their drinking water which may cause cancer. Since Tennessee's drinking water comes from the Pigeon River in North Carolina, the source of these chemicals is the waste discharges of industrial paper plants in North Carolina. This is an example of a(n):

a) external cost imposed on the citizens of Tennessee by the industrial plants of North Carolina.
b) market failure where the market price of the output of these industrial plants does not fully reflect the social cost of producing these goods.
c) externality where the marginal social costs of producing these industrial goods differ from the marginal private costs.
d) all of these.

Answer 1

The issue with Tennessee's water supply is an example of an external cost, market failure, and negative externality, highlighting the need for government intervention to address market failures caused by environmental pollution.

Step-by-step explanation:

The issue with the drinking water in Tennessee is an example of all of the following: a) an external cost imposed on the citizens of Tennessee by the industrial plants of North Carolina, b) a market failure where the market price of the output of these industrial plants does not fully reflect the social cost of producing these goods, and c) an externality where the marginal social costs of producing these industrial goods differ from the marginal private costs. This occurrence is a typical case of a negative externality in production, where a firm's activities reduce the well-being of others who are not compensated by the firm, resulting in a situation where the manufacturer will choose to produce more of the product than would be produced if the manufacturer were required to pay all associated environmental costs.

Externalities like this highlight the ongoing environmental challenges related to industrialization and its impact on water pollution and public health. Government intervention is often necessary to address these market failures, whether through taxes, permits for pollution, or direct regulations.