Multiple Choice
Which of the following mitigation tactics could reduce the economic risk associated with negative externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following best describes the economic concept associated with the use of non-local resources and its impact on society?
A
Comparative advantage, because non-local resources are always used by those who can produce at the lowest opportunity cost.
B
Externalities, because the use of non-local resources can impose costs or benefits on others not directly involved in the transaction.
C
Diminishing marginal utility, because the satisfaction from using non-local resources decreases with each additional unit consumed.
D
Opportunity cost, because using non-local resources always leads to the highest-valued alternative being forgone.
Verified step by step guidance1
Step 1: Understand the key terms in the problem. The question asks about the economic concept related to the use of non-local resources and their impact on society. The options include Comparative Advantage, Externalities, Diminishing Marginal Utility, and Opportunity Cost.
Step 2: Define each concept briefly: Comparative Advantage refers to producing goods at the lowest opportunity cost; Externalities are costs or benefits affecting third parties not involved in the transaction; Diminishing Marginal Utility means satisfaction decreases with each additional unit consumed; Opportunity Cost is the value of the next best alternative forgone.
Step 3: Analyze the role of non-local resources. When non-local resources are used, they can create effects beyond the immediate buyer and seller, such as environmental damage or benefits to others, which are not reflected in the market price.
Step 4: Recognize that these effects on third parties are called Externalities, which can be either positive or negative and impact society as a whole.
Step 5: Conclude that the best description of the economic concept related to the use of non-local resources and their societal impact is Externalities, because it captures the idea of costs or benefits imposed on others not directly involved in the transaction.
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