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?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is a barrier to achieving growth in the overall manufacturing market due to externalities related to social benefits and social costs?
A
Failure to account for negative externalities such as pollution
B
Perfect competition among all firms
C
Unlimited access to natural resources
D
Government subsidies for all manufacturing firms
Verified step by step guidance1
Step 1: Understand the concept of externalities in microeconomics. Externalities occur when a firm's actions impose costs or benefits on third parties that are not reflected in market prices. These can be negative (e.g., pollution) or positive (e.g., innovation spillovers).
Step 2: Identify how externalities affect social costs and social benefits. Social cost includes private costs plus any external costs, while social benefit includes private benefits plus any external benefits. When negative externalities exist, social costs exceed private costs, leading to market inefficiency.
Step 3: Analyze the options given in the problem to determine which one represents a barrier to growth due to externalities. Consider whether each option accounts for or ignores external costs or benefits.
Step 4: Recognize that 'Failure to account for negative externalities such as pollution' means that firms do not bear the full social cost of their production, causing overproduction and inefficiency, which can hinder sustainable growth in the manufacturing market.
Step 5: Conclude that the presence of unaccounted negative externalities is a barrier to growth because it distorts market outcomes, unlike perfect competition, unlimited resources, or government subsidies, which do not inherently reflect external social costs.
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