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

• A. A student receiving a scholarship for academic achievement
• B. Air pollution from a factory affecting nearby residents
• C. A homeowner planting flowers that improve neighborhood aesthetics
• D. A company providing free vaccinations to its employees

Answer: (B)

Verified step by step guidance

1. Step 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. Step 2: Differentiate between positive and negative externalities. A positive externality benefits third parties, while a negative externality imposes costs on them.
3. Step 3: Analyze each option to identify whether it creates a positive or negative externality or no externality at all.
4. Step 4: Recognize that 'Air pollution from a factory affecting nearby residents' imposes a cost on people who are not involved in the factory's production, which is a classic example of a negative externality.
5. Step 5: Conclude that the other options either represent positive externalities or private benefits, so the correct example of a negative externality is the air pollution from the factory.