Multiple Choice
Differences in production efficiencies among nations in producing a particular good result from:
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following scenarios best illustrates a negative externality?
A
A factory emits pollution into the air, affecting the health of nearby residents.
B
A company provides free training to its employees, improving their productivity.
C
A homeowner plants a beautiful garden that increases neighborhood property values.
D
A student receives a scholarship for academic achievement.
Verified step by step guidance1
Step 1: Understand the concept of an externality. An externality occurs when a decision causes costs or benefits to third parties who are not involved in the decision-making process.
Step 2: Differentiate between positive and negative externalities. A positive externality provides benefits to others, while a negative externality imposes costs on others.
Step 3: Analyze each scenario to identify whether it involves external costs or benefits affecting third parties.
Step 4: Recognize that a factory emitting pollution imposes health costs on nearby residents, which are unintended and uncompensated effects—this is a classic example of a negative externality.
Step 5: Confirm that the other scenarios involve positive effects or private benefits without imposing external costs, so they do not illustrate negative externalities.
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