Question

Prices are NOT externalities for each of the following reasons EXCEPT that:

a,prices are the focus of decision making, not the side effect of decisions.

b,prices redistribute costs and benefits but do not affect the total value of them.

c,if a price rises, future buyers will face the higher price.

d,prices induce people to buy more or less and therefore are a factor in their decision making.

Answer 1

Prices are NOT externalities for each of the following reasons EXCEPT that:

b,prices redistribute costs and benefits but do not affect the total value of them.

An externality is a cost or benefit that results from an activity or transaction and affects a third party who did not choose to incur the cost or benefit. So, when prices redistribute cost and benefits, it might affect a third party who did not choose to be the subject, either by incurring a cost or benefit to the party. It might come as a indirect benefit to thrid party(investment in education) or indirect cost like health checkup costs due to pollution.

Answer 2

The exception is option D: "prices induce people to buy more or less and therefore are a factor in their decision making."

Option D correctly identifies that prices play a significant role in influencing people's buying decisions. When prices rise, consumers tend to buy less of a product or service, and when prices fall, they may buy more. This relationship between prices and consumer behavior is a fundamental concept in economics, known as the law of demand.

Options A, B, and C are all valid reasons why prices are not externalities:

A. Prices are the focus of decision making, not the side effect of decisions. Prices are crucial in allocating resources and determining what goods and services get produced and consumed. They act as signals in the market, guiding producers and consumers in making choices.

B. Prices do redistribute costs and benefits among market participants based on supply and demand. Higher prices generally benefit suppliers (sellers) by increasing revenue, while lower prices may benefit consumers (buyers) by reducing costs.

C. If a price rises, future buyers will indeed face the higher price. Prices in the market fluctuate based on various factors such as changes in demand, supply, production costs, or external events. Future buyers will have to adapt to the prevailing market price at the time of their purchase.

Therefore, the correct statement is option D: "prices induce people to buy more or less and therefore are a factor in their decision making." Prices have a direct impact on consumer behavior and play a central role in influencing market outcomes.