Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Positive externalities can lead to underproduction of goods that benefit society.
B
Negative externalities always result in government intervention.
C
Market equilibrium is always socially optimal when externalities are present.
D
Government subsidies can be used to encourage activities that generate positive externalities.
E
Externalities only affect individuals who are directly involved in the transaction.
Understanding the Answer
Let's break down why this is correct
Answer
Externalities are effects that happen when a person's actions impact others who are not directly involved in a transaction. For example, if a factory pollutes a river, the local community suffers from dirty water, even though they are not part of the factory's business. This situation shows that the factory's decision affects the health and well-being of nearby residents, illustrating a negative externality. On the other hand, if someone plants a beautiful garden that everyone enjoys, this is a positive externality because the community benefits without paying for it. Understanding externalities is important because they can lead to market failures, where the true costs or benefits of actions are not reflected in prices, making it harder for society to make the best choices.
Detailed Explanation
Other options are incorrect because Some people think that positive effects always mean more production; It's a common belief that negative effects always need government help.
Key Concepts
Externalities
Market Failure
Government Intervention
Topic
Externalities in Economics
Difficulty
medium level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.