Multiple Choice
Which term describes the individual use of products that can lead to externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following would most likely constitute a negative externality affecting free resources?
A
A homeowner installing solar panels on their roof
B
A company planting trees in a public park
C
A factory discharging untreated waste into a river used by local communities
D
A restaurant offering free meals to the homeless
Verified step by step guidance1
Step 1: Understand the concept of a negative externality. A negative externality occurs when an economic activity imposes a cost on third parties who are not involved in the transaction, without compensation.
Step 2: Identify what free resources are. Free resources are goods or services that are available without direct payment, often shared by the community, such as clean air, water, or public parks.
Step 3: Analyze each option to see if it imposes an uncompensated cost on others using a free resource. For example, a factory discharging untreated waste into a river pollutes the water, harming local communities who rely on that river.
Step 4: Recognize that the factory's pollution reduces the quality of the free resource (the river), which is a classic example of a negative externality because the factory does not bear the full social cost of its actions.
Step 5: Contrast this with other options, such as installing solar panels or planting trees, which generally have positive or neutral effects on free resources, or offering free meals, which does not impose a cost on a free resource.
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