Which of the following is an example of a negative externality?

Question

BlackTom AI · Accepted Answer

A negative externality occurs when an economic activity imposes an unpriced cost (a disutility or harm) on a third party who is neither the producer nor the consumer involved in the transaction.

1. Relevant knowledge points and concepts
- Externality: a side effect of an activity affecting third parties.
- Negative externality: imposes costs on others (e.g., pollution, noise, bad smells).
- Positive externality: confers benefits on others without payment.
- Key distinction: the effect must be on an external third party and typically unintentional/uncompensated.

2. Step-by-step reasoning
- Examine each option to see whether an unpriced effect falls on a third party and whether that effect is harmful (negative) or beneficial (positive).
- Option D: Ron dislikes the smell of his next-door neighbor’s cooking. The neighbor’s cooking creates an unpleasant smell that affects Ron (a third party). Ron experiences disutility that he did not choose or pay for — this is a classic negative externality.
- Option A: Lisa likes her roommate’s candle because she enjoys the smell. That is a benefit to a third party and would be a positive externality, not negative.
- Option B: Roy pays a higher price for a bicycle because his car broke down. This is a private cost consequence of Roy’s circumstances; it does not impose an external cost on an unrelated third party, so it is not an externality.
- Option C: Hermione cooks dinner because her spouse isn’t feeling well. This is an internal household transfer/intended help; it’s not an unintended external cost imposed on an unrelated third party.

3. Intermediate steps / calculations
- No numerical calculation is required; the identification relies on whether the effect is unpriced, third-party, and harmful.

4. Why the correct answer is correct
- Ron’s situation meets all criteria for a negative externality: the neighbor’s cooking produces an unpleasant external effect (smell) that imposes a cost (disutility) on Ron without compensation.

5. Why other options are incorrect
- A is a positive externality (benefit, not harm). B is a private cost, not an externality. C is an internal family action/intended benefit, not an external third-party harm.

6. Conclusion
- The correct answer is "Ron dislikes the smell of his next-door neighbor's cooking," which matches the provided answer.

Which of the following is an example of a negative externality?Single choice

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