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12 Sep 2024, 22:29
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Consumption, production, and investment decisions of individuals, households, and firms often affect people not directly involved in the transactions. Sometimes these indirect effects are tiny. But when they are large they can become problematic—what economists call externalities. Externalities are among the main reasons governments intervene in the economic sphere.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Based on the information in the passage, it can be inferred that governments are most likely to intervene in the economy when:
A. Externalities result in significant differences between private and social costs.
B. Consumers are able to influence the price of goods based on supply and demand.
C. The production opportunities for firms are optimized without affecting others.
D. The benefits of production are fully absorbed by those directly involved in the transactions.
E. Firms efficiently incorporate the costs of negative externalities into their pricing.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Based on the information in the passage, it can be inferred that governments are most likely to intervene in the economy when:
A. Externalities result in significant differences between private and social costs.
B. Consumers are able to influence the price of goods based on supply and demand.
C. The production opportunities for firms are optimized without affecting others.
D. The benefits of production are fully absorbed by those directly involved in the transactions.
E. Firms efficiently incorporate the costs of negative externalities into their pricing.
12 Sep 2024, 22:29
Kudos
Bookmarks
Official Solution:
Consumption, production, and investment decisions of individuals, households, and firms often affect people not directly involved in the transactions. Sometimes these indirect effects are tiny. But when they are large they can become problematic—what economists call externalities. Externalities are among the main reasons governments intervene in the economic sphere.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Based on the information in the passage, it can be inferred that governments are most likely to intervene in the economy when:
A. Externalities result in significant differences between private and social costs.
B. Consumers are able to influence the price of goods based on supply and demand.
C. The production opportunities for firms are optimized without affecting others.
D. The benefits of production are fully absorbed by those directly involved in the transactions.
E. Firms efficiently incorporate the costs of negative externalities into their pricing.
A. Externalities result in significant differences between private and social costs.
The passage states that externalities are among the main reasons for government intervention, especially when private and social costs diverge.
Incorrect Answers:
B. This is unrelated to the concept of externalities discussed in the passage.
C. If there are no negative effects on others, government intervention is less likely.
D. This suggests no externalities are present, reducing the need for intervention.
E. If firms incorporate these costs, there's no need for government intervention.
Answer: A
Consumption, production, and investment decisions of individuals, households, and firms often affect people not directly involved in the transactions. Sometimes these indirect effects are tiny. But when they are large they can become problematic—what economists call externalities. Externalities are among the main reasons governments intervene in the economic sphere.
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns or costs to society as a whole.
In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution. The indirect costs include decreased quality of life, say in the case of a homeowner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.
Based on the information in the passage, it can be inferred that governments are most likely to intervene in the economy when:
A. Externalities result in significant differences between private and social costs.
B. Consumers are able to influence the price of goods based on supply and demand.
C. The production opportunities for firms are optimized without affecting others.
D. The benefits of production are fully absorbed by those directly involved in the transactions.
E. Firms efficiently incorporate the costs of negative externalities into their pricing.
A. Externalities result in significant differences between private and social costs.
The passage states that externalities are among the main reasons for government intervention, especially when private and social costs diverge.
Incorrect Answers:
B. This is unrelated to the concept of externalities discussed in the passage.
C. If there are no negative effects on others, government intervention is less likely.
D. This suggests no externalities are present, reducing the need for intervention.
E. If firms incorporate these costs, there's no need for government intervention.
Answer: A
