Author Question: What does it mean to say that an individual or a firm has internalized an externality? What will ... (Read 13 times)

lilldybug07 · **on:** Jun 29, 2018

What does it mean to say that an individual or a firm has internalized an externality?

What will be an ideal response?

Question 2

When the economy goes into recession, the biggest increase in unem-ployment is _________.

A. structural because jobs are lost in most states
B. cyclical because jobs are lost in many industries as they cut production
C. frictional because the creation of jobs slows
D. the combination of structural and frictional as few new jobs are created.

ankilker · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Externalities are external costs or benefits that firms or consumers do not consider when making decisions. When incentives are altered such that an externality is taken into account, firms and individuals are said to have internalized the externality. So, for example, suppose I raise bees next door to your apple orchard. The bees pollinate your tress and so there is an externality. The externality will be internalized if I buy your orchard.

Answer to Question 2

B Cyclical unemployment is the unemployment resulting from a recession.