Which of the following would be classified as an external cost?
A) As more firms began hiring computer programmers, the salaries of computer programmers increased, and therefore the firm's cost of production increased.
B) A private firm will not provide national defense, as it is impossible to confine the benefits to only those individuals who have paid for it.
C) You are not able to study at night because there is so much noise coming from the dorm room next to yours.
D) When you purchase a prescription drug, you are not made fully aware of all the possible side effects that may result from taking the drug.

Question

Quizplus · Accepted Answer

External costs, also known as externalities, are costs that are not borne by the parties involved in a transaction. In choice C, the noise from the dorm room is an external cost imposed on you by your neighbors' actions, affecting your ability to study without being a direct participant in the cause of the noise.

Which of the Following Would Be Classified as an External