Which of the Following Statements Best Describes Externalities

question 47

Multiple Choice

Which of the following statements best describes externalities?

• A)An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favourable effect on other operations, then this is not an externality.
• B)An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to decline.
• C)The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favour the NPV.
• D)Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.

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Definitions:

Preferences

Individual tastes or desires that influence their choices among various goods, services, or outcomes.

Fewer Errors

A reduction in mistakes or inaccuracies, often resulting in improved efficiency, quality, or performance in various contexts.

System 1

A term often used in psychology to describe the fast, automatic, and emotional way of thinking, as opposed to the slower, more logical thinking of System 2.

Decision Making

The process of selecting among alternatives to achieve a goal or solve a problem.