Multiple Choice
When considering externalities, companies should be aware that social costs and social benefits may differ from private costs and private benefits because:
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is an example of a negative externality?
A
A student receiving a scholarship for academic achievement
B
Air pollution from a factory affecting nearby residents
C
A homeowner planting flowers that improve neighborhood aesthetics
D
A company providing free vaccinations to its employees
Verified step by step guidance1
Step 1: Understand the concept of an externality. An externality occurs when a third party is affected by the actions of others, without this effect being reflected in market prices.
Step 2: Differentiate between positive and negative externalities. A positive externality benefits third parties, while a negative externality imposes costs on them.
Step 3: Analyze each option to identify whether it creates a positive or negative externality or no externality at all.
Step 4: Recognize that 'Air pollution from a factory affecting nearby residents' imposes a cost on people who are not involved in the factory's production, which is a classic example of a negative externality.
Step 5: Conclude that the other options either represent positive externalities or private benefits, so the correct example of a negative externality is the air pollution from the factory.
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