Multiple Choice
Which of the following is a possible option to employ when demand for a good with externalities exceeds its capacity?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which type of cost does the increased car insurance premium for individuals convicted of drunk driving best represent in the context of externalities?
A
An external cost
B
A private cost
C
A public good
D
A social benefit
Verified step by step guidance1
Step 1: Understand the definitions of the key terms involved: Private cost refers to the cost borne directly by the individual or firm involved in a transaction or activity. External cost (or externality) refers to costs imposed on third parties who are not involved in the activity. Public goods are goods that are non-excludable and non-rivalrous, and social benefits are the total benefits to society including both private and external benefits.
Step 2: Identify who bears the increased car insurance premium cost. Since the premium increases for individuals convicted of drunk driving, the cost is directly paid by those individuals themselves.
Step 3: Determine if the cost affects third parties or society at large. The increased insurance premium does not impose a direct cost on others; it is a penalty or consequence internal to the individual’s own expenses.
Step 4: Conclude that because the cost is borne privately by the individual and not by others, it is classified as a private cost rather than an external cost or social cost.
Step 5: Recognize that this cost is not related to public goods or social benefits, as it is a direct financial consequence for the individual, not a shared resource or a benefit to society.
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