A developer builds 100 new homes next to an old grocery store. Which of the following is most likely to result from this development?

• A. The new homes decrease the social benefit to the community.
• B. There is no impact on the grocery store or the community.
• C. The grocery store experiences a positive externality due to increased demand from new residents.
• D. The grocery store faces a negative externality because of reduced foot traffic.

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 actions of others, either positively (positive externality) or negatively (negative externality), without this effect being reflected in market prices.
2. Step 2: Identify the parties involved in the scenario: the developer building new homes, the grocery store, and the community. The new homes bring in new residents who may shop at the grocery store.
3. Step 3: Analyze how the new homes affect the grocery store. More residents typically mean more potential customers, which can increase the grocery store's demand and sales.
4. Step 4: Determine the type of externality. Since the grocery store benefits from increased demand due to the new homes, this is a positive externality experienced by the grocery store.
5. Step 5: Conclude that the development leads to a positive externality for the grocery store, as the new residents increase its customer base, improving its business prospects.