Which of the following best describes a challenge in the Middle East resulting from oil production, in terms of externalities?

• A. Positive externalities from oil production always outweigh any social costs.
• B. Private costs of oil production are always higher than social costs due to government subsidies.
• C. Oil production in the Middle East has no impact on social benefits or social costs.
• D. Negative externalities such as environmental pollution increase social costs beyond private costs.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of externalities. Externalities occur when a production or consumption activity affects third parties who are not directly involved in the transaction. These effects can be positive (benefits) or negative (costs).
2. Step 2: Identify the difference between private costs and social costs. Private costs are the costs borne by the producer, while social costs include both private costs and any additional costs imposed on society (such as pollution).
3. Step 3: Analyze oil production in the Middle East in terms of externalities. Consider how oil production might generate negative externalities, such as environmental pollution, which impose additional costs on society beyond what producers pay.
4. Step 4: Recognize that negative externalities increase social costs beyond private costs. This means that the true cost to society is higher than the cost reflected in the market price of oil production.
5. Step 5: Conclude that the challenge in the Middle East related to oil production is that negative externalities like environmental pollution raise social costs, which is why the correct description involves acknowledging these external costs beyond private costs.