Question

Suppose a firm's CFO thinks that an externality is present in a project, but that it cannot be quantified with any precision estimates of its effect would really just be guesses. In this case, the externality should be ignored--i.e., not considered at all because if it were considered it would make the analysis appear more precise than it really is.

1. True
2. False

Answer 1

2. False

Step-by-step explanation:

An externality refers to something that you don't have control over and that can affect you in a positive or negative way. Companies shouldn't ignore externalities because if you analyze your environment and you are able to identify possible externalities and have an idea of what to expect, you will be able to take measures that can help you manage their impact even if you are don't have an accurate measure of their effect. Because of that, the statement is false.

Answer 2

2. False

Step-by-step explanation:

An externality is a situation in which the costs or benefits of producing or consuming a good or service are not reflected in its market price.

Viewed differently, externalities are side effects (good or bad) that occur when a person or a company carries out an activity and does not bear all the costs of it, or all the benefits that it could bring.

Therefore the important thing is to have it as a budget beyond what they are estimates.