In the context of externalities, how did monopolies and trusts in the late 1800s impact the social costs and benefits within industry and banking?

• A. They increased social benefits by ensuring equal market access for all firms.
• B. They had no effect on social benefits or social costs in industry and banking.
• C. They increased social costs by reducing competition, leading to higher prices and less innovation.
• D. They decreased social costs by promoting free market competition and lowering prices.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of externalities, which are costs or benefits that affect third parties not directly involved in a transaction. In this context, social costs refer to the total costs to society, including private costs and any external costs imposed by firms.
2. Step 2: Recognize that monopolies and trusts reduce competition by consolidating market power in the hands of a few firms, which can influence prices and output levels in the industry and banking sectors.
3. Step 3: Analyze how reduced competition from monopolies leads to higher prices and less incentive for innovation, which increases social costs because consumers pay more and the overall efficiency of the market declines.
4. Step 4: Contrast this with the idea that increased competition typically lowers prices and encourages innovation, which would decrease social costs and increase social benefits, but monopolies do the opposite by restricting competition.
5. Step 5: Conclude that monopolies and trusts in the late 1800s increased social costs by reducing competition, leading to negative externalities such as higher prices and less innovation, which harmed overall social welfare.