Which of the following gives rise to a pecuniary externality?
A) Excessive consumption of alcohol leading to bad health
B) A sudden increase in the demand for diamonds, leading to an increase in their prices
C) Deforestation, leading to the extinction of many species
D) Globalization, leading to the displacement of indigenous workers

Question

Quizplus · Accepted Answer

A pecuniary externality is a type of externality in which an economic transaction affects people other than the buyer and seller by changing the prices of goods and services. In this case, a sudden increase in the demand for diamonds would lead to an increase in their prices, which would affect not only the buyers and sellers of diamonds, but also other people who might be interested in purchasing diamonds in the future. This effect is pecuniary because it involves changes in prices rather than changes in physical or environmental conditions.

Which of the Following Gives Rise to a Pecuniary Externality