Question

Which of the following describes an externality and which does​ not? Explain the difference. a. A policy of restricted coffee exports in Brazil causes the U.S. price of coffee to riselong dash an increase which in turn also causes the price of tea to rise. b. An advertising blimp distracts a motorist who then hits a telephone pole. A. Choice​ (b) describes an externality. The advertising blimp imposes a cost on the motorist that is not accounted for in the market price of advertising. The restriction on coffee exports has market​ effects, which are not externalities. B. Neither choice describes an externality. Choice​ (a) describes market effects and choice​ (b) describes nonmarket​ effects, neither of which creates an externality. C. Both choices describe an externality because both describe actions that affect a third party not directly involved in the initial transaction. D. Choice​ (a) describes an externality. The restriction on coffee exports has an external​ effect; it causes an increase in the price of tea. The blimp distracting the motorist is a nonmarket issue and therefore​ doesn't count as an economic externality.

Answer 1

Answer: The correct answer is "A. Choice​ (b) describes an externality. The advertising blimp imposes a cost on the motorist that is not accounted for in the market price of advertising. The restriction on coffee exports has market​ effects, which are not externalities. ".

Explanation: Choice​ (b) describes an externality. The advertising blimp imposes a cost on the motorist that is not accounted for in the market price of advertising. The restriction on coffee exports has market​ effects, which are not externalities.

An externality is a situation in which the costs or benefits of producing or consuming a good or service are not reflected in its market price despite having an external impact.

In case A, the situation is reflected in the market price, while in case B, the external situation, despite having an impact, does not affect the market price.