Multiple Choice
Which of the following statements is NOT true of both pollution permits and corrective taxes?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is a disadvantage of an economic group in the context of externalities, social benefits, and social costs?
A
Economic groups always maximize social welfare.
B
Economic groups ensure that private benefits always equal social benefits.
C
Economic groups may create negative externalities that increase social costs.
D
Economic groups eliminate all market failures.
Verified step by step guidance1
Step 1: Understand the concept of economic groups in microeconomics. Economic groups are collections of individuals or firms that coordinate their actions to achieve certain economic objectives, which can influence externalities, social benefits, and social costs.
Step 2: Recall the definitions of externalities, social benefits, and social costs. Externalities are costs or benefits that affect third parties not directly involved in a transaction. Social benefits include private benefits plus any positive externalities, while social costs include private costs plus any negative externalities.
Step 3: Analyze the statements given in the problem. Economic groups do not always maximize social welfare because their actions might prioritize private gains over collective well-being.
Step 4: Recognize that economic groups may create negative externalities. This means their coordinated actions can lead to increased social costs, such as pollution or resource depletion, which are not accounted for in private decision-making.
Step 5: Conclude that the disadvantage of economic groups is that they may generate negative externalities, increasing social costs, rather than eliminating market failures or ensuring private benefits equal social benefits.
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