Q. “It refers to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized)” is related to which of the following?

[A] Depreciation

[B] Externalities

[C] Appreciation

[D] Circular flow of income

Answer: B
Notes:

Explanation: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized).

  • Externalities do not have any market in which they can be bought and sold. For example, let us suppose there is an oil refinery which refines crude petroleum and sells it in the market.
  • The output of the refinery is the amount of oil it refines. We can estimate the value added of the refinery by deducting the value of intermediate goods used by the refinery (crude oil in this case) from the value of its output.
  • The value added of the refinery will be counted as part of the GDP of the economy. But in carrying out the production the refinery may also be polluting the nearby river. This may cause harm to the people who use the water of the river.
  • Hence their wellbeing will fall. Pollution may also kill fish or other organisms of the river on which fish survive.
  • As a result, the fishermen of the river may be losing their livelihood. Such harmful effects that the refinery is inflicting on others, for which it will not bear any cost, are called externalities.

Source: NCERT – Macro economics