Which of the following best describes how changes in the quality of a good can create externalities related to social benefits and social costs?

• A. Externalities from quality changes only occur when the government intervenes.
• B. Improved quality may increase social benefits if it leads to positive spillover effects for others not directly involved in the transaction.
• C. Decreased quality always results in higher social benefits for society.
• D. Changes in quality only affect private costs and benefits, and never result in externalities.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of externalities. Externalities occur when a decision causes costs or benefits to third parties who are not directly involved in the transaction. These can be positive (benefits) or negative (costs).
2. Step 2: Recognize that changes in the quality of a good can affect not only the private benefits and costs to the buyer and seller but also the social benefits and costs experienced by others in society.
3. Step 3: Analyze how improved quality might create positive externalities. For example, a higher-quality product could lead to better health outcomes, increased productivity, or environmental benefits that spill over to others beyond the immediate buyer and seller.
4. Step 4: Understand that decreased quality could potentially create negative externalities, such as harm to others or increased costs to society, but it does not inherently increase social benefits.
5. Step 5: Conclude that externalities related to quality changes do not require government intervention to exist; they arise naturally when the quality change affects third parties, thus impacting social benefits or costs beyond private transactions.