Multiple Choice
In the absence of externalities, which of the following statements is true regarding the relationship between private and social costs and benefits?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is NOT an example of a positive externality related to social benefits and social costs?
A
A company pollutes a river, increasing cleanup costs for others.
B
A student volunteers at a local library, benefiting the community.
C
A homeowner plants trees that improve air quality for the neighborhood.
D
A person receives a flu vaccine, reducing the risk of disease for others.
Verified step by step guidance1
Step 1: Understand the concept of a positive externality. A positive externality occurs when an activity provides benefits to third parties who are not directly involved in the transaction or decision, leading to social benefits that exceed private benefits.
Step 2: Identify examples of positive externalities by looking for situations where the actions of an individual or firm create benefits for others without compensation. For instance, volunteering, planting trees, and vaccinations typically generate such benefits.
Step 3: Recognize that a negative externality occurs when an activity imposes costs on others, such as pollution increasing cleanup costs. This represents a social cost exceeding private cost.
Step 4: Analyze each option to determine whether it represents a positive externality (social benefits > private benefits) or a negative externality (social costs > private costs).
Step 5: Conclude that the example involving pollution is NOT a positive externality because it imposes additional costs on others, making it a negative externality instead.
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