Multiple Choice
Which of the following is an example of a market failure related to externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
A developer builds 100 new homes next to an old grocery store. Which of the following is most likely to result from this development?
A
The new homes decrease the social benefit to the community.
B
There is no impact on the grocery store or the community.
C
The grocery store experiences a positive externality due to increased demand from new residents.
D
The grocery store faces a negative externality because of reduced foot traffic.
Verified step by step guidance1
Step 1: Understand the concept of externalities. Externalities occur when a third party is affected by the actions of others, either positively (positive externality) or negatively (negative externality), without this effect being reflected in market prices.
Step 2: Identify the parties involved in the scenario: the developer building new homes, the grocery store, and the community. The new homes bring in new residents who may shop at the grocery store.
Step 3: Analyze how the new homes affect the grocery store. More residents typically mean more potential customers, which can increase the grocery store's demand and sales.
Step 4: Determine the type of externality. Since the grocery store benefits from increased demand due to the new homes, this is a positive externality experienced by the grocery store.
Step 5: Conclude that the development leads to a positive externality for the grocery store, as the new residents increase its customer base, improving its business prospects.
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