Question

1. Which of the examples below illustrates the economic principle of a external cost?

a. cost of rebuilding roads damaged by trucks heavily loaded with goods

b. cost of transportation of goods from the site of production to a market

c. cost of labor to produce a product

d. cost or benefit of a transaction that involves the buyer or seller when both parties lose money

Answer 1

Answer: a. cost of rebuilding roads damaged by trucks heavily loaded with goods

Comments: External costs (externalities): costs imposed upon third party when goods and services are produced and consumed. External costs do not influence the business. However, the internal costs are the costs involved in planning, construction, management, maintenance and disposal of products and their wastes products. Internal costs influence someone who has relationship with the producing company (production staffs, management, labours sellers and buyers etc.)

            In the above question costs on transport of goods (option-b), labour (option-c) and cost or benefit of between buyers and sellers (option-d) are examples of internal cost. The rebuilding the road is an example of external cost.