Which of the following best describes the impact of renewable natural resources on economic activities in the context of externalities?

• A. They have no effect on social costs or benefits because they are naturally replenished.
• B. They only impact private costs and do not influence social costs or benefits.
• C. They can generate positive externalities by providing ongoing social benefits such as clean air and water.
• D. They always lead to negative externalities due to overuse and depletion.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of externalities. Externalities occur when a third party is affected by the economic activities of others, leading to social costs or benefits that are not reflected in private costs or benefits.
2. Step 2: Recognize that renewable natural resources, such as forests, clean air, and water, can provide benefits beyond the individual user, which are called positive externalities. These benefits include ecosystem services like air purification and water filtration.
3. Step 3: Analyze why renewable resources do not have 'no effect' on social costs or benefits. Even though they are naturally replenished, their use or preservation affects society's well-being, so they do influence social costs and benefits.
4. Step 4: Consider that renewable resources impact more than just private costs. Their availability and quality affect the broader community, meaning social costs and benefits must be accounted for, not just private ones.
5. Step 5: Conclude that renewable natural resources can generate positive externalities by providing ongoing social benefits, such as clean air and water, which improve overall social welfare beyond individual consumption.