Multiple Choice
Which of the following is a major hindrance for a firm trying to increase profits when its activities generate negative externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following best defines 'crowding out' in the context of externalities and social costs?
A
When positive externalities lead to higher social benefits than private benefits.
B
When the market equilibrium achieves both allocative and productive efficiency.
C
When increased government intervention reduces private sector activity.
D
When negative externalities cause the social cost to be less than the private cost.
Verified step by step guidance1
Step 1: Understand the concept of 'crowding out' in economics. It generally refers to a situation where increased government activity or spending leads to a reduction in private sector activity.
Step 2: Recognize that 'crowding out' is often discussed in the context of government intervention, such as increased public spending or regulation, which can discourage or replace private investment or consumption.
Step 3: Differentiate 'crowding out' from externalities. Externalities are costs or benefits affecting third parties not involved in a transaction, while crowding out focuses on the interaction between government and private sector activities.
Step 4: Analyze the given options by matching the definition of 'crowding out' with the descriptions. The correct definition involves government intervention reducing private sector activity.
Step 5: Conclude that the best definition of 'crowding out' in this context is: 'When increased government intervention reduces private sector activity.'
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