Recently, the State of Tennessee discovered chemical compounds in their drinking water which may cause cancer. Since Tennessee's drinking water comes from the Pigeon River in North Carolina, the source of these chemicals is the waste discharges of industrial paper plants in North Carolina. This is an example of a(n):
a. external cost imposed on the citizens of Tennessee by the industrial plants of North Carolina.
b. market failure where the market price of the output of these industrial plants does not fully reflect the social cost of producing these goods.
c. externality where the marginal social costs of producing these industrial goods differ from the marginal private costs.
d. all of these.
Question 2
Banks have more expertise than individual households in making loans because banks:
a. lend smaller amounts of money.
b. are regulated by the government.
c. also pay interest to savers.
d. are subject to severe penalties if they make bad loans.
e. make many more loans than individual households do.
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