Economic sanctions against foreign governments sometimes create externalities because:

• A. they always result in increased social benefits for the sanctioning country
• B. they guarantee improved welfare for the citizens of the sanctioned country
• C. they can impose social costs on populations not directly involved in the targeted government's actions
• D. they eliminate all market failures associated with international trade

Answer: (C)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when a decision causes costs or benefits to third parties who are not directly involved in the transaction or decision.
2. Analyze the nature of economic sanctions: Sanctions are actions taken by one country to influence another country's behavior, often by restricting trade or financial interactions.
3. Identify who is affected by sanctions: While sanctions target a foreign government, they can also impact other groups such as civilians, businesses, or neighboring countries who are not directly responsible for the targeted government's actions.
4. Recognize that these unintended effects on third parties represent externalities, specifically negative externalities if they impose social costs like economic hardship or reduced welfare on uninvolved populations.
5. Conclude that economic sanctions create externalities because they can impose social costs on populations not directly involved in the targeted government's actions, rather than guaranteeing benefits or eliminating market failures.