Which of the following is an example of crowding out in the context of externalities?

• A. Government spending on public parks reduces private investment in recreational facilities.
• B. A consumer's purchase of a product increases its market price for others.
• C. Vaccination programs create positive spillover effects for society.
• D. A factory pollutes a river, causing health problems for nearby residents.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of 'crowding out' in the context of externalities. Crowding out occurs when government intervention or spending reduces or displaces private sector activity that would have otherwise occurred.
2. Step 2: Analyze each option to see if government action leads to a reduction in private activity. For example, if government spending on a public good causes private firms or individuals to reduce their own spending or investment in similar goods or services, this is crowding out.
3. Step 3: Evaluate the option 'Government spending on public parks reduces private investment in recreational facilities.' Here, the government provides a public good (parks), which may reduce the incentive for private investors to build or maintain recreational facilities, illustrating crowding out.
4. Step 4: Contrast this with other options: a consumer's purchase increasing market price is a demand effect, vaccination programs creating positive spillovers are positive externalities, and pollution causing health problems is a negative externality. None of these describe crowding out.
5. Step 5: Conclude that the correct example of crowding out is when government spending on public parks reduces private investment in recreational facilities, as it directly shows government action displacing private sector activity.