Question

The product-variety externality is associated with the A. opportunity cost of firms exiting a monopolistically competitive industry. B. loss of consumer surplus from exposure to additional advertising. C. producer surplus that accrues to incumbent firms in a monopolistically competitive industry. D. consumer surplus that is generated from the introduction of a new product.

Answer 1

Answer:

The correct answer is letter "D": consumer surplus that is generated from the introduction of a new product.

Explanation:

Externalities are defined as the effects passed on third parties as a result of the actions of another individual or organization even if the third party has nothing to do with the operations of the individuals or entities. Externalities can be positive or negative.

The product-variety externality is an example of a positive externality. The product-variety externality takes place when a new product is introduced in the market generating a consumer surplus. Thus, end-users benefit from the variety of products available in the market even if that represents more competition for companies.