A Level Economics AQA Practice Exam

Which of the following best describes external benefits?

1. Benefits deriving exclusively from government spending

2. Benefits that affect parties not directly involved in a transaction

3. Only benefits received by wealthy individuals

4. Benefits that are exclusively related to private consumption

The correct answer is: Benefits that affect parties not directly involved in a transaction

External benefits, also known as positive externalities, refer to advantages that spill over to individuals or groups that are not directly involved in an economic transaction. In practical terms, this means that when a particular transaction occurs, there can be additional positive effects on third parties, leading to an overall increase in societal welfare. For instance, if a farmer decides to plant flowers along their field, it not only benefits the farmer through potentially higher sales but also provides beauty for passersby, enhances the environment with improved air quality, and may support local ecosystems. This concept is central to understanding the broader impacts of economic activities beyond the immediate exchanges. The other options describe scenarios that do not capture the essence of external benefits. Benefits deriving exclusively from government spending relate to public finance and are not tied to the direct transactions between buyers and sellers. Focusing on benefits only received by wealthy individuals ignores the widespread nature of external benefits, which can be enjoyed by any party affected by the transaction. Lastly, limiting benefits to those exclusively related to private consumption neglects the social and collective nature of externalities.