Multiple Choice
Which of the following is a potential negative result of trade agreements in the context of externalities, social benefits, and social costs?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which characteristic do goods like gasoline, tobacco, and alcohol typically share in the context of externalities?
A
They have no impact on third parties and thus do not create externalities.
B
They are examples of public goods that are non-excludable and non-rivalrous.
C
They provide positive externalities, resulting in social benefits greater than private benefits.
D
They generate negative externalities, leading to social costs greater than private costs.
Verified step by step guidance1
Step 1: Understand the concept of externalities. Externalities occur when the consumption or production of a good affects third parties who are not directly involved in the market transaction.
Step 2: Identify the types of externalities. Positive externalities create social benefits greater than private benefits, while negative externalities create social costs greater than private costs.
Step 3: Analyze the characteristics of goods like gasoline, tobacco, and alcohol. These goods often impose costs on others, such as pollution from gasoline or health costs from tobacco and alcohol consumption.
Step 4: Recognize that these costs are not reflected in the market price, meaning the private cost to consumers or producers is less than the true social cost to society.
Step 5: Conclude that gasoline, tobacco, and alcohol typically generate negative externalities because their consumption or production leads to social costs exceeding private costs.
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