Question

Consider the following scenario:

Suppose that a chicken farm uses a nearby stream to dispose of the wastes released by its chickens. These wastes flow downstream into a lake that has become thick with algae and polluted by the minerals in the waste matter. The local office of a nonprofit environmental organization collects enough donations to fund a campaign to stop the farm's pollution.
Which of the following types of private solutions to the externality of pollution has occurred in this case?

a) Moral codes and social sanctions
b) Integration of different types of businesses through merger or acquisition
c) Contracts
d) Charities

It's important to note that sometimes private solutions to externalities do not work. For example, this occurs when communications barriers or social customs are important enough relative to the potential gains involved that _____________.

Answer 1

The correct Answer is D.

Step-by-step explanation:

The topic under question is found in economics of business as Market Failure. The sub topic is Externalities.

Externalities occur when one person's actions (most especially the corporate person under law) affect another person's well-being and the relevant costs and benefits are not reflected in market prices.

An example is given in the question.

The government can sometimes try to solve this through regulation, taxation, and subsidies. However, private solutions do exist as well. An example of such is Charities.

Charities utilize donations from private individuals towards eliminating or stopping actions that result in negative externalities or encouraging behaviors that bring about positive externalities. The former can be seen in the case of organizations that preserve the environment, while the latter is exemplified through organizations that generate money for education.

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