Multiple Choice
Which of the following is an example of market failure related to externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is true about pollution from a firm emitting waste into the environment?
A
results in a positive externality because the firm benefits society
B
means the firm's private cost is equal to the social cost
C
does not affect individuals who are not involved in the production process
D
creates a negative externality because the social cost exceeds the private cost
Verified step by step guidance1
Understand the concept of externalities: Externalities occur when a firm's actions affect third parties who are not directly involved in the production or consumption process. These effects can be either positive or negative.
Identify the type of externality in the problem: Pollution from a firm emitting waste is a classic example of a negative externality because it imposes costs on others (e.g., health issues, environmental damage) that the firm does not pay for.
Distinguish between private cost and social cost: The private cost is the cost borne by the firm itself, such as production expenses. The social cost includes both the private cost and the external costs imposed on society due to pollution.
Recognize that when a firm pollutes, the social cost exceeds the private cost because the negative effects on third parties are not accounted for by the firm.
Conclude that pollution from the firm creates a negative externality, meaning the firm's private cost is less than the social cost, which leads to market inefficiency if not corrected.
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