Multiple Choice
Which of the following best explains how outsourcing contributes to global economic interdependence in the context of externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is considered a negative externality associated with offshoring and outsourcing?
A
Lower production costs for firms
B
Increased unemployment in the domestic labor market
C
Improved efficiency through specialization
D
Greater access to global markets
Verified step by step guidance1
Step 1: Understand the concept of externalities. Externalities are costs or benefits that affect third parties who are not directly involved in an economic transaction. A negative externality imposes a cost on others, while a positive externality provides a benefit.
Step 2: Identify the effects of offshoring and outsourcing. Offshoring and outsourcing can lead to lower production costs for firms, improved efficiency through specialization, and greater access to global markets. These are generally benefits to the firms and consumers.
Step 3: Consider the impact on the domestic labor market. Offshoring and outsourcing may cause some domestic workers to lose their jobs because production or services are moved to other countries where labor is cheaper.
Step 4: Recognize that increased unemployment in the domestic labor market is a cost borne by workers and communities, not directly by the firms benefiting from offshoring. This fits the definition of a negative externality.
Step 5: Conclude that among the options given, 'Increased unemployment in the domestic labor market' is the negative externality associated with offshoring and outsourcing.
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