Question

Suppose that repeated application of a pesticide used on orange trees causes harmful contamination of groundwater. The pesticide is applied annually in almost all of the orange groves throughout the world. Most orange growers regard the pesticide as a key input in their production of oranges.

(a) Use a diagram of the market for pesticide to illustrate the implication of a failure of orange producer's costs to reflect the social costs of grondwater contamination.
(b)Use your diagram from part(a), to explain a government policy that might be effective in achieving the amount orange production that fully reflects all social costs.

Answer 1

The unintended consequences caused from activities of the market create externalities. In other words, externality takes place when a market activity has an impact on a third party as well. The externality results in positive or negative effect to individuals or firms.

A negative externality is said to take place when a market activity adversely affects a third party.It is also referred to as external costs.

It is given that the orange producers use pesticides to grow oranges which contaminate the ground water.