Multiple Choice
Which of the following restrictive practices is most closely related to the presence of externalities in terms of social benefits and social costs?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is a major hindrance for a firm trying to increase profits when its activities generate negative externalities?
A
The firm benefits from positive externalities created by competitors.
B
The firm will always receive government subsidies for its production.
C
The firm can ignore all market regulations without consequence.
D
The firm may face increased social costs that are not reflected in its private costs.
Verified step by step guidance1
Understand the concept of externalities: Externalities occur when a firm's actions affect third parties who are not directly involved in the transaction. Negative externalities impose costs on others, while positive externalities provide benefits.
Identify the difference between private costs and social costs: Private costs are the costs borne directly by the firm, while social costs include both private costs and the external costs imposed on society due to negative externalities.
Recognize that when a firm generates negative externalities, its private costs underestimate the true cost of production because social costs are higher than private costs.
Understand that this discrepancy can hinder profit maximization because the firm may face additional costs such as government regulations, taxes, or penalties designed to internalize the externality and align private costs with social costs.
Conclude that the major hindrance for the firm is the increased social costs not reflected in private costs, which can reduce profits or force the firm to change its production decisions.
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