Final answer:
Water pollution from factories in Tijuana, Mexico caused beach closures in San Diego, California, hurting the local economy. These losses are considered external costs, a type of negative externality in production. Government intervention is required to address market failures caused by pollution.
Step-by-step explanation:
Water pollution from factories in Tijuana, Mexico caused beach closures in San Diego, California, which hurt the local economy. These losses are considered external costs because they are faced by individuals or sectors of the economy that are not directly involved in the production or consumption of the factory products.
External costs are a type of negative externality in production. They occur when a firm's production reduces the well-being of others who are not compensated by the firm. In this case, the pollution from the factories caused harm to the beachgoers and local businesses, leading to economic losses.
Government intervention is required to address market failures caused by externalities like pollution. This can be done through command-and-control approaches, taxes on polluting goods, or tradable permits for pollution.