Which one of the following best explains why so few firms are global, considering the impact of externalities on social benefits and social costs?

• A. Global firms face no additional costs compared to domestic firms.
• B. Positive externalities always guarantee higher profits for global firms.
• C. Social benefits from externalities are always internalized by global firms.
• D. The presence of negative externalities increases social costs, making global expansion less attractive for firms.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of externalities in microeconomics. Externalities occur when a firm's actions impose costs or benefits on others that are not reflected in market prices. These can be positive (benefits) or negative (costs).
2. Step 2: Recognize that social costs include both private costs borne by the firm and external costs imposed on society. When negative externalities are present, social costs exceed private costs.
3. Step 3: Analyze how negative externalities affect firms considering global expansion. If expanding globally increases negative externalities, the social costs rise, which can make such expansion less attractive due to potential regulatory, reputational, or operational challenges.
4. Step 4: Contrast this with the idea that positive externalities increase social benefits but may not always be internalized by firms, meaning firms might not capture all the benefits of going global, limiting their incentive to expand.
5. Step 5: Conclude that the presence of negative externalities raises social costs, which can deter firms from becoming global, explaining why relatively few firms expand internationally despite potential market opportunities.