Which of the following is an example of a negative externality (additional social cost)?

• A. A homeowner plants a garden that beautifies the neighborhood
• B. A company provides free training that increases workers' productivity
• C. A person receives a flu vaccine, reducing the risk of disease for others
• D. A factory emits pollution that affects the health of nearby residents

Answer: (D)

Verified step by step guidance

1. Understand the concept of an externality: an externality occurs when a third party is affected by the actions of others, without this effect being reflected in market prices.
2. Distinguish between positive and negative externalities: a positive externality provides benefits to others (additional social benefits), while a negative externality imposes costs on others (additional social costs).
3. Analyze each option to identify whether it creates additional social costs or benefits beyond the private costs or benefits:
4. Recognize that a factory emitting pollution imposes health costs on nearby residents, which are not accounted for in the factory's private costs, thus representing a negative externality (additional social cost).
5. Conclude that the correct example of a negative externality is the factory emitting pollution affecting the health of nearby residents.