Multiple Choice
Which of the following is an example of a negative externality (additional social cost)?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following mitigation tactics could reduce the economic risk associated with negative externalities?
A
Imposing a tax equal to the external cost
B
Subsidizing the production of goods with negative externalities
C
Eliminating all government intervention in the market
D
Encouraging firms to increase output regardless of external costs
Verified step by step guidance1
Step 1: Understand what a negative externality is — it occurs when the production or consumption of a good imposes a cost on third parties that is not reflected in the market price.
Step 2: Recognize that economic risk from negative externalities arises because the market outcome leads to overproduction or overconsumption, causing social costs to exceed private costs.
Step 3: Identify that an effective mitigation tactic should align private costs with social costs, internalizing the externality so that producers or consumers take the external cost into account.
Step 4: Analyze the options: imposing a tax equal to the external cost increases the private cost to reflect the social cost, thereby reducing overproduction and economic risk.
Step 5: Understand why other options fail: subsidizing production encourages more negative externalities, eliminating government intervention ignores the problem, and encouraging firms to increase output worsens the externality.
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