Which type of cost does the increased car insurance premium for individuals convicted of drunk driving best represent in the context of externalities?

• A. An external cost
• B. A private cost
• C. A public good
• D. A social benefit

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definitions of the key terms involved: Private cost refers to the cost borne directly by the individual or firm involved in a transaction or activity. External cost (or externality) refers to costs imposed on third parties who are not involved in the activity. Public goods are goods that are non-excludable and non-rivalrous, and social benefits are the total benefits to society including both private and external benefits.
2. Step 2: Identify who bears the increased car insurance premium cost. Since the premium increases for individuals convicted of drunk driving, the cost is directly paid by those individuals themselves.
3. Step 3: Determine if the cost affects third parties or society at large. The increased insurance premium does not impose a direct cost on others; it is a penalty or consequence internal to the individual’s own expenses.
4. Step 4: Conclude that because the cost is borne privately by the individual and not by others, it is classified as a private cost rather than an external cost or social cost.
5. Step 5: Recognize that this cost is not related to public goods or social benefits, as it is a direct financial consequence for the individual, not a shared resource or a benefit to society.