Concept:
In environmental economics, an externality occurs when the production or consumption activities of one economic agent impart unintended costs (negative externality) or benefits (positive externality) to uncompensated third parties.
When market prices fail to reflect these external social costs or benefits, market failure arises. Step 1: Systematic Analysis of Externality Types:
1. Negative Production Externality (A): Occurs when an industrial manufacturing activity imposes uncompensated environmental costs on society. A factory discharging untreated chemical effluents into a river damages municipal water supplies and fisheries downstream. Thus, A corresponds to IV.
2. Negative Consumption Externality (B): Arises when an individual's private consumption of a commodity generates adverse side effects for bystanders. For example, individuals driving private automobiles cause traffic congestion and heighten the accident risk for other commuters. Thus, B corresponds to III.
3. Positive Production Externality (C): Occurs when a firm's production creates spillover benefits for other enterprises. Constructing an airport improves regional logistical accessibility, which promotes trade, commerce, and tourism for surrounding businesses. Thus, C corresponds to II.
4. Positive Consumption Externality (D): Arises when private consumption confers spillover advantages on neighbors. A homeowner who maintains an architecturally attractive home and garden raises the aesthetic and market valuation of adjacent properties. Thus, D corresponds to I. Step 2: Compilation of Matched Pairs:
Combining the matched relationships:
A matches with IV.
B matches with III.
C matches with II.
D matches with I.
The resulting configuration is A - IV, B - III, C - II, D - I. Final Answer:
The correct matching sequence is given by option (B).
