External costs arise when
Multiple Choice
social costs are greater than private costs.
private costs are too low.
private costs are greater than social costs.
social costs are too low.
social costs are greater than private costs.
External costs arise when private costs are too low.
The correct answer is:
social costs are greater than private costs.
External costs refer to the negative consequences or impacts of an economic activity that are not directly borne by the individual or organization engaging in the activity. These costs are also known as externalities. External costs arise when the cost to society, referred to as the social cost, exceeds the cost to the individual or firm, known as the private cost.
To determine whether external costs exist, one needs to compare the social costs and private costs associated with a particular economic activity. Social costs include both private costs and external costs. Private costs, on the other hand, include the direct expenses or costs that an individual or business incurs for engaging in an economic activity.
If the social costs of an activity, which take into account external costs, are higher than the private costs of the same activity, then there are external costs present. This means that the negative consequences or impacts of the activity are not fully borne by the individual or organization responsible for it, and society as a whole is bearing some of the costs. In such cases, the external costs may be considered as market failures, as the price mechanism fails to reflect the true cost of the activity.
Therefore, when social costs are greater than private costs, external costs arise.