(02.07 MC) A large-scale grain farm relies on an adjacent river for irrigation and drainage and uses pesticides to protect otect crops from insects. Which of the following is a potential negative externality resulting from this activity? Higher prices for locally produced fruits Improved health for residents living nearby Damage to downstream plant and animal life Reduced demand for organic and raw produce

## Step 1<br />The problem is asking us to identify a potential negative externality resulting from a large-scale grain farm's activities. An externality is a cost or benefit that affects a party who did not choose to incur that cost or benefit. In this case, the farm's activities include irrigation, drainage, and the use of pesticides.<br /><br />## Step 2<br />The options provided are:<br />- Higher prices for locally produced fruits<br />- Improved health for residents living nearby<br />- Damage to downstream plant and animal life<br />- Reduced demand for organic and raw produce<br /><br />## Step 3<br />We need to identify which of these options is a negative externality. Negative externalities are costs that affect a party who did not choose to incur that cost.<br /><br />## Step 4<br />The first option, higher prices for locally produced fruits, is not a negative externality. It is a potential effect of the farm's activities, but it does not directly affect the environment or other parties.<br /><br />## Step 5<br />The second option, improved health for residents living nearby, is also not a negative externality. It is a potential benefit of the farm's activities, not a cost.<br /><br />## Step 6<br />The third option, damage to downstream plant and animal life, is a negative externality. The use of pesticides can lead to runoff into the river, which can harm downstream plant and animal life.<br /><br />## Step 7<br />The fourth option, reduced demand for organic and raw produce, is not a negative externality. It is a potential effect of the farm's activities, but it does not directly affect the environment or other parties.