Big Construction Company Wants to Create a New Housing Development

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Examlex · Accepted Answer

The Answer is An economist would point out that an externality exists: there is no market for the habitat of the spotted ducks. This externality means that the social costs of building the new houses exceed the costs figured into Big Construction Company's business plan. To rectify this situation, an economist would suggest devising a business plan that incorporates the price of destroying the spotted duck's habitat into Big Construction Company's development costs. The diagram:

An economist would point out that an externality exists: there is no market for the habitat of the spotted ducks. This externality means that the social costs of building the new houses exceed the costs figured into Big Construction Company's business plan. To rectify this situation, an economist would suggest devising a business plan that incorporates the price of destroying the spotted duck's habitat into Big Construction Company's development costs. The diagram: In the diagram it is clear that incorporating a price of destroying the duck's habitat results in higher costs and so reduces the number of houses (from Q<sub>0</sub> to Q<sub>1</sub>) that it is profitable for Big Construction Company to build, and raises the cost of houses to those who buy them (from P<sub>0</sub> to P<sub>1</sub>). The most difficult part of implementing the plan is likely to be the determination of the appropriate cost to society for destroying the duck's habitat. Big Construction Company will argue that the destruction of the habitat has a low price while the animal rights group will argue that it has a high price.

In the diagram it is clear that incorporating a price of destroying the duck's habitat results in higher costs and so reduces the number of houses (from Q₀ to Q₁) that it is profitable for Big Construction Company to build, and raises the cost of houses to those who buy them (from P₀ to P₁).
The most difficult part of implementing the plan is likely to be the determination of the appropriate cost to society for destroying the duck's habitat. Big Construction Company will argue that the destruction of the habitat has a low price while the animal rights group will argue that it has a high price.

Big Construction Company Wants to Create a New Housing Development

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