A landfill site produces an obnoxious odour. Homes downwind of the site rent for $1,000 per month while homes upwind of the site rent for $1,500 per month. If the odour is the only detectable difference between the two neighbourhoods, the difference in the rent is the ________ of the odour.

Question

Quizplus · Accepted Answer

The odour is a negative externality that affects the homeowners downwind of the landfill site, causing their homes to rent for a lower price of $1,000 per month. This is an example of an external cost, as the cost of the odour is not being borne by the landfill site, but rather by the homeowners downwind. Meanwhile, the homeowners upwind are not affected by the odour and are able to rent their homes for a higher price of $1,500 per month. The difference in rent is therefore the external cost of the odour.

A Landfill Site Produces an Obnoxious Odour