Multiple Choice
Which of the following is a possible external factor that may affect businesses due to externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is an example of a positive externality (additional social benefit)?
A
A driver causes traffic congestion during rush hour.
B
A company monopolizes a market and raises prices.
C
A factory emits pollution that harms nearby residents.
D
A homeowner plants a garden that beautifies the neighborhood.
Verified step by step guidance1
Step 1: Understand the concept of a positive externality. A positive externality occurs when an activity or decision by an individual or firm results in additional benefits to third parties or society that are not reflected in market prices.
Step 2: Review each option and identify whether it creates additional social benefits (positive externality) or social costs (negative externality).
Step 3: Analyze the option 'A driver causes traffic congestion during rush hour.' This creates a cost for others (delays), so it is a negative externality, not positive.
Step 4: Analyze the option 'A company monopolizes a market and raises prices.' This typically reduces consumer surplus and does not create additional social benefits, so it is not a positive externality.
Step 5: Analyze the option 'A factory emits pollution that harms nearby residents.' Pollution imposes costs on others, so it is a negative externality, not positive. The option 'A homeowner plants a garden that beautifies the neighborhood' creates additional social benefits by improving the environment and aesthetics for others, which is a positive externality.
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