ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A chemical factory discharges waste into a river, and downstream fishing businesses suffer lower catches. The factory's selling price reflects only its own production costs. In microeconomic terms, which term best describes the harm borne by the fishing businesses?
It is a negative externality, because the factory's production imposes a cost on third parties, the fishing businesses, that is not reflected in the factory's price or costs. A positive externality would instead involve an uncompensated benefit to outsiders.
- AA positive externality
- BA negative externalityCorrect
- CA merit good effect
- DA public good effect
Explanation
The fishing businesses bear a cost that arises from the factory's production but is not paid for by the factory or reflected in its price. This is a negative externality. A positive externality would be an unpaid benefit to third parties.
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