Which of the following describes a positive externality?

• A. A homeowner plants trees that improve air quality for the neighborhood.
• B. A company increases its prices, reducing consumer surplus.
• C. A driver causes traffic congestion during rush hour.
• D. A factory emits pollution that harms nearby residents.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of an externality. An externality occurs when a decision causes costs or benefits to third parties who are not involved in the decision-making process.
2. Step 2: Differentiate between positive and negative externalities. A positive externality provides benefits to others, while a negative externality imposes costs on others.
3. Step 3: Analyze each option to identify whether it creates benefits or costs for third parties. For example, planting trees that improve air quality benefits neighbors, which is a positive externality.
4. Step 4: Recognize that increasing prices reducing consumer surplus is a market effect but not an externality, as it does not directly affect third parties outside the transaction.
5. Step 5: Identify that traffic congestion and pollution impose costs on others, making them negative externalities, not positive ones.