Suppose a firm's CFO thinks that an externality is present in a project, but that it cannot be quantified with any precision⎯estimates of its effect would really just be guesses.In this case, the externality should be ignored⎯i.e., not considered at all⎯because if it were considered it would make the analysis appear more precise than it really is.

Question

Quizplus · Accepted Answer

Ignoring an externality simply because it cannot be precisely quantified can lead to suboptimal decision-making. Even if an externality cannot be precisely quantified, it is important to acknowledge its presence and attempt to account for its potential impact in the analysis, using a range of estimates or qualitative assessments if necessary. This approach ensures a more comprehensive evaluation of the project's potential effects.

Suppose a Firm's CFO Thinks That an Externality Is Present