An externality is a side effect of a market activity affecting others not directly involved. Which of the following is a negative externality?

An externality is a side effect of a market activity affecting others not directly involved. Which of the following is a negative externality?

• A. Vaccination reduces disease transmission.
• B. Education spillovers increase productivity.
• C. A well-maintained public park increases property values.
• D. Pollution harms nearby residents.

Answer: (D)

Externalities happen when the result of a market activity affects people who aren’t directly involved in the transaction. A negative externality is when those effects impose costs on others not part of the decision. Pollution from production harms people living nearby through health problems, higher medical costs, and a lower quality of life. Those costs aren’t paid by the polluter in the market price, so the social cost exceeds the private cost and the market underestimates the true cost of production. The other scenarios create positive externalities: vaccination benefits others by reducing disease spread, education spillovers raise productivity for people beyond the individual learner, and a well-kept public park raises nearby property values, delivering benefits to others without imposing costs.

Externalities happen when the result of a market activity affects people who aren’t directly involved in the transaction. A negative externality is when those effects impose costs on others not part of the decision.

Pollution from production harms people living nearby through health problems, higher medical costs, and a lower quality of life. Those costs aren’t paid by the polluter in the market price, so the social cost exceeds the private cost and the market underestimates the true cost of production.

The other scenarios create positive externalities: vaccination benefits others by reducing disease spread, education spillovers raise productivity for people beyond the individual learner, and a well-kept public park raises nearby property values, delivering benefits to others without imposing costs.