Which of the following best explains why U.S. firms often move manufacturing jobs overseas in the context of externalities and social costs?

• A. Because overseas production always results in higher social benefits for the U.S.
• B. To avoid government subsidies for domestic manufacturing
• C. Because foreign countries have stricter environmental regulations, lowering social costs
• D. To reduce private production costs, even if it increases negative externalities abroad

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of externalities and social costs. Externalities occur when a firm's production or consumption affects third parties not directly involved in the transaction. Social costs include both private costs borne by the firm and external costs imposed on society.
2. Step 2: Recognize that firms aim to minimize their private production costs to maximize profits. When domestic production involves higher costs due to regulations or wages, firms may seek cheaper alternatives abroad.
3. Step 3: Analyze how moving manufacturing overseas can reduce private costs for U.S. firms, even if it leads to increased negative externalities (such as pollution) in the foreign country, which are not internalized by the firm.
4. Step 4: Understand that stricter environmental regulations in the U.S. increase the firm's private costs, so relocating production to countries with laxer regulations lowers these costs but may increase social costs abroad.
5. Step 5: Conclude that the primary motivation for U.S. firms moving manufacturing overseas is to reduce their private production costs, despite potentially increasing negative externalities in other countries, rather than to gain higher social benefits or avoid subsidies.