Which scenario best illustrates a negative externality, where social costs exceed private costs?

• A. A beekeeper's bees pollinate nearby orchards, increasing fruit yields for neighboring farmers.
• B. A factory emits pollution into a river, harming local fisheries and increasing cleanup costs for the community.
• C. A consumer purchases a product at its market price, reflecting both private and social costs.
• D. A government subsidizes education, increasing the overall skill level of the workforce.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of a negative externality. A negative externality occurs when the social cost of an activity exceeds the private cost borne by the individual or firm undertaking the activity. This means that the activity imposes additional costs on third parties or society that are not reflected in the market price.
2. Step 2: Identify the private cost and social cost in each scenario. Private cost is the cost to the individual or firm directly involved, while social cost includes both private cost and any external costs imposed on others.
3. Step 3: Analyze the beekeeper scenario. The beekeeper's bees help pollinate nearby orchards, which benefits neighboring farmers. This is a positive externality because it creates benefits for others beyond the beekeeper's private gains.
4. Step 4: Analyze the factory pollution scenario. The factory emits pollution into a river, harming local fisheries and increasing cleanup costs for the community. Here, the factory's private cost does not include the environmental damage and cleanup costs, so social costs exceed private costs, illustrating a negative externality.
5. Step 5: Review the other options. A consumer purchasing a product at market price reflects private and social costs if the market is efficient, and government subsidies for education create positive externalities by improving workforce skills. Neither represents a negative externality.