Question

Which of the following illustrates the concept of external cost?

A) Bad weather reduces the size of the wheat crop.
B) A reduction in the size of the wheat crop causes income of wheat farmers to fall.
C) Smoking harms the health of the smoker.
D) Smoking harms the health of nearby nonsmokers.
E) Public health services reduce the transmission of disease.

Answer 1

Option D, smoking harming the health of nearby nonsmokers, illustrates the concept of external cost.

Step-by-step explanation:

The concept of external cost refers to the costs that are imposed on society as a whole but are not directly accounted for by the firm or individual causing the cost.

In this context, Option D illustrates the concept of external cost as smoking harms the health of nearby nonsmokers.

The smokers are not bearing the full cost of their actions, as the negative health effects are externalized onto the nonsmokers.