Multiple Choice
Research has indicated that polluting facilities are often built in which type of neighborhoods?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following conditions is most likely to result in a negative externality, where social costs exceed private costs?
A
A consumer purchases a product at its market price.
B
A company provides free vaccinations to its employees, reducing disease spread.
C
A government subsidizes renewable energy production.
D
A factory emits pollution that affects nearby residents without compensating them.
Verified step by step guidance1
Step 1: Understand the concept of externalities. An externality occurs when a third party is affected by the actions of others, and this effect is not reflected in market prices.
Step 2: Differentiate between positive and negative externalities. A negative externality happens when social costs exceed private costs, meaning the activity imposes additional costs on society that the producer or consumer does not pay for.
Step 3: Analyze each option to identify if the activity imposes external costs or benefits on others. For example, purchasing a product at market price typically reflects private costs, so no externality is implied.
Step 4: Recognize that activities like providing free vaccinations or subsidizing renewable energy usually generate positive externalities, as they benefit others beyond the direct consumer or producer.
Step 5: Identify that a factory emitting pollution without compensating affected residents creates a negative externality because the social cost of pollution (health, environment) is higher than the private cost borne by the factory.
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