Which of the following is an example of a 'hidden' social cost associated with basing production in a foreign location?

• A. Lower transportation costs due to proximity to raw materials
• B. Higher wages paid to foreign workers
• C. Improved access to international markets
• D. Increased pollution affecting local communities near the foreign factory

Answer: (D)

Verified step by step guidance

1. Understand the concept of 'social cost' in microeconomics: it refers to the total cost to society, including both private costs borne by producers and external costs imposed on others.
2. Recognize that 'hidden' social costs are externalities that are not reflected in the market price but affect third parties negatively, such as environmental damage or health impacts.
3. Analyze each option to determine if it represents a private cost, a benefit, or an external social cost. For example, lower transportation costs and improved market access are private benefits, while higher wages are private costs.
4. Identify that increased pollution affecting local communities is an external cost because it imposes harm on people who are not directly involved in the production process, making it a hidden social cost.
5. Conclude that the correct example of a hidden social cost is the increased pollution near the foreign factory, as it represents a negative externality not accounted for in production costs.