Multiple Choice
Which of the following statements best describes the efficiency of producing a good in the presence of externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is an example of a negative externality?
A
A homeowner plants a garden that beautifies the neighborhood.
B
A factory emits pollution that affects nearby residents' health.
C
A student receives a scholarship for academic achievement.
D
A company provides free training to its employees, increasing their productivity.
Verified step by step guidance1
Step 1: Understand the concept of an externality. An externality occurs when a decision causes costs or benefits to third parties who are not involved in the decision-making process.
Step 2: Differentiate between positive and negative externalities. A positive externality provides benefits to others (e.g., beautifying a neighborhood), while a negative externality imposes costs on others (e.g., pollution affecting health).
Step 3: Analyze each option to identify whether it creates external costs or benefits for third parties:
- A homeowner planting a garden beautifies the neighborhood, which is a positive externality.
- A factory emitting pollution harms nearby residents' health, which is a negative externality.
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