Check Your Understanding

1. Question

   Wastewater runoff from large poultry farms adversely affects residents in neighboring homes. Explain the following:

   1. why this is considered an externality problem

   2. the efficiency of the outcome with neither government intervention nor a private deal

   3. how the socially optimal outcome is determined and how it compares with the no-intervention, no-deal outcome

2. Question

   According to Yasmin, any student who borrows a book from the university library and fails to return it on time imposes a negative externality on other students. She claims that rather than charging a modest fine for late returns, the library should charge a huge fine, so that borrowers will never return a book late. Is Yasmin’s economic reasoning correct?