Multiple Choice
Pigovian taxes and direct controls are two government solutions for which market situation?
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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?
A
A driver causes traffic congestion during rush hour.
B
A homeowner plants a garden that beautifies the neighborhood.
C
A company dumps waste into a river, harming aquatic life.
D
A factory emits pollution that affects nearby residents.
Verified step by step guidance1
Step 1: Understand the concept of a positive externality. A positive externality occurs when an individual's or firm's actions result in benefits to others that are not reflected in market prices.
Step 2: Analyze each option to determine if the action provides an unintended benefit to third parties (positive externality) or an unintended cost (negative externality).
Step 3: For the option 'A driver causes traffic congestion during rush hour,' recognize this creates a negative externality because it imposes costs on others (delays, stress).
Step 4: For the option 'A homeowner plants a garden that beautifies the neighborhood,' identify this as a positive externality because the garden improves the neighborhood's appearance, benefiting others without compensation.
Step 5: For the options involving pollution ('A company dumps waste into a river' and 'A factory emits pollution'), these are negative externalities since they harm others and the environment.
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