Which of the following best defines 'crowding out' in the context of externalities and social costs?

• A. When positive externalities lead to higher social benefits than private benefits.
• B. When the market equilibrium achieves both allocative and productive efficiency.
• C. When increased government intervention reduces private sector activity.
• D. When negative externalities cause the social cost to be less than the private cost.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of 'crowding out' in economics. It generally refers to a situation where increased government activity or spending leads to a reduction in private sector activity.
2. Step 2: Recognize that 'crowding out' is often discussed in the context of government intervention, such as increased public spending or regulation, which can discourage or replace private investment or consumption.
3. Step 3: Differentiate 'crowding out' from externalities. Externalities are costs or benefits affecting third parties not involved in a transaction, while crowding out focuses on the interaction between government and private sector activities.
4. Step 4: Analyze the given options by matching the definition of 'crowding out' with the descriptions. The correct definition involves government intervention reducing private sector activity.
5. Step 5: Conclude that the best definition of 'crowding out' in this context is: 'When increased government intervention reduces private sector activity.'