It is the custom for paper mills located alongside the Layzee River to discharge waste products into the river.Operators of hydroelectric generating plants on the river find they must clean up the river's water before it flows through their equipment. The above situation is an example of:
A) an external economy.
B) a spillover cost.
C) the exclusion principle.
D) a spillover benefit.

Question

Quizplus · Accepted Answer

The situation described is an example of a spillover cost, also known as a negative externality. The paper mills do not take into account the harm their waste products cause to other businesses along the Layzee River, such as the hydroelectric generating plants, resulting in a cost being imposed on these businesses that is not reflected in the market price.

It Is the Custom for Paper Mills Located Alongside the Layzee