Economics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 25

When U.S. farmers in the Southwest irrigate their land, salt in the ground soil leaks into the Colorado River. The Colorado River has become so salty that Mexican farmers further down the river cannot irrigate their own land, and Mexican crops have been devastated. Explain why this situation constitutes a negative externality, how it leads to too much irrigation, and what it would mean for U.S. farmers to internalize the externality.