Which of the following best explains how the industrialization of foreign countries can lead to increased global competition, considering the concept of externalities?

• A. Industrialization in foreign countries reduces the number of firms in global markets, decreasing competition.
• B. Industrialization in foreign countries only impacts domestic markets and does not influence global competition.
• C. Industrialization abroad increases production capacity, leading to more firms competing internationally and affecting both social benefits and social costs.
• D. Industrialization abroad eliminates all negative externalities associated with production, making global competition irrelevant.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of externalities in microeconomics. Externalities occur when a firm's production or consumption affects third parties not directly involved in the market transaction, leading to social benefits (positive externalities) or social costs (negative externalities).
2. Step 2: Analyze how industrialization in foreign countries affects production capacity. Industrialization typically increases the ability of firms to produce goods efficiently, which can lead to more firms entering the global market or existing firms expanding their output.
3. Step 3: Connect increased production capacity to global competition. When foreign countries industrialize, they can produce more goods at lower costs, increasing the number of competitors in international markets and intensifying competition.
4. Step 4: Consider the role of externalities in this process. Industrialization can generate both positive externalities (such as technological spillovers) and negative externalities (such as pollution), which influence social benefits and social costs beyond the private market transactions.
5. Step 5: Conclude that industrialization abroad affects global competition by increasing the number of firms competing internationally and impacting social benefits and costs through externalities, rather than reducing competition or eliminating externalities altogether.