Multiple Choice
Which of the following best explains how a business can increase its sales and profits yet still experience problems related to externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following best explains why trade barriers can be harmful to an economy, considering the concepts of externalities, social benefits, and social costs?
A
Trade barriers often increase social costs by reducing market efficiency and limiting access to goods and services.
B
Trade barriers have no impact on externalities or the overall welfare of society.
C
Trade barriers decrease social costs by encouraging international cooperation.
D
Trade barriers always increase social benefits by protecting domestic industries from competition.
Verified step by step guidance1
Step 1: Understand the concept of trade barriers, which are government-imposed restrictions such as tariffs, quotas, or regulations that limit international trade between countries.
Step 2: Recall that externalities are costs or benefits that affect third parties not directly involved in a transaction. Trade barriers can influence these externalities by altering market outcomes.
Step 3: Analyze how trade barriers affect social costs and social benefits. Social costs include private costs plus any external costs, while social benefits include private benefits plus any external benefits.
Step 4: Recognize that trade barriers often reduce market efficiency by limiting competition and access to a variety of goods and services, which can increase social costs by causing resource misallocation and higher prices.
Step 5: Conclude that because trade barriers tend to increase social costs and reduce overall welfare by decreasing efficiency and limiting consumer choice, the best explanation is that they harm the economy by increasing social costs.
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