Multiple Choice
Which of the following best describes a negative externality in terms of social costs and benefits?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is considered a positive externality beyond the control of a business?
A
A factory emitting pollution that harms local residents' health
B
A firm raising prices due to increased demand for its product
C
A business increasing its own profits through cost-cutting measures
D
A company planting trees that improve air quality for the surrounding community
Verified step by step guidance1
Step 1: Understand the concept of externalities. Externalities occur when a third party is affected by the actions of a business or individual, without this effect being reflected in market prices.
Step 2: Differentiate between positive and negative externalities. A positive externality provides benefits to others beyond the direct consumer or producer, while a negative externality imposes costs on others.
Step 3: Analyze each option to identify whether it represents an externality and if it is positive or negative. For example, pollution harming health is a negative externality, while planting trees that improve air quality is a positive externality.
Step 4: Recognize that externalities are typically beyond the direct control of the business in terms of their broader social impact, even if the business causes them.
Step 5: Conclude that the option describing a company planting trees that improve air quality is a positive externality beyond the control of the business, as it benefits the surrounding community without direct compensation.
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