How would an economist likely respond to the statement “There is no such thing a

Question

How would an economist likely respond to the statement “There is no such thing as an acceptable level of pollution”?

A.An economist would agree with this statement because western countries have sufficient monetary resources to invest in pollution-reducing equipment. Further, people can change their consumer choices to eliminate pollution.

B.An economist would disagree with this statement because although reducing pollution has benefits, doing so also has costs. The optimal level of pollution is where the marginal benefit of reducing pollution just equals the marginal cost.

C.An economist would disagree with this statement because the market is able to allocate sufficient resources to reducing pollution to an acceptable level. Externalities are taken into account by those making market choices.

D. An economist would agree with this statement because the word "acceptable" reflects individual preferences, which are not easily accounted for in a market with externalities such as pollution.

Explanation / Answer

The externality is the cost or benefit of an economic activity that spill over onto the society. A positive externality provides a benefit to the society and is called spillover benefit. The classic example of spillover benefit is education. A negative externality provides a cost to the society and is called spillover cost. The classic example of spillover cost is pollution.

Economic activity causes pollution. Pollution is a spillover cost of production that causes inequality and distorts the allocation of resources. Government therefore regulates private business by the standard approach and incentive based environmental policies.

The optimal level of pollution is the amount of pollution where the marginal cost of reducing pollution is the marginal benefit of reducing pollution.

Therefore, the correct option is

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