Denise is thinking about setting up a butterfly garden in her backyard. She estimates that it will cost her $2,000 to purchase and install special plants and an irrigation system to attract butterflies. The benefit she expects to receive is $1,800. In addition, neighbor Billy will receive a benefit of $150 and neighbor Sammy will receive a benefit of $100. From this, we can conclude that:
A) butterflies are a negative externality for Billy and Sammy.
B) Denise will set up the butterfly garden without any help from her free-rider neighbors.
C) if Sammy refuses to contribute to the butterfly garden, he will be unable to enjoy its benefits if it is built.
D) if Billy refuses to contribute to the butterfly garden, Denise will not have one.
E) if Billy and Sammy contribute the amounts at which they value the butterfly garden, Denise will set it up.

Question

Quizplus · Accepted Answer

This scenario is an example of a positive externality, where the benefits of Denise's butterfly garden extend beyond just her. Billy and Sammy receive benefits without paying for them. However, this does not necessarily make butterflies a negative externality for them. 
Since Denise will receive a net benefit from setting up the garden, she will likely proceed with it. If Billy and Sammy contribute the amounts they value the garden, it will be more likely for Denise to set it up as it will cover more of the costs. However, if they refuse to contribute, Denise may still set up the garden if she is willing to bear the additional costs. Therefore, the best choice is E.

Denise Is Thinking About Setting Up a Butterfly Garden in Her