Which of the following best describes a negative externality in terms of social costs and private costs?

• A. Private benefit equals social benefit in all market transactions.
• B. Social benefit is greater than private benefit due to positive spillovers.
• C. Private cost exceeds social cost because of government subsidies.
• D. Social cost exceeds private cost due to external harm imposed on others.

Answer: (D)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when a third party is affected by a market transaction, either positively (positive externality) or negatively (negative externality).
2. Define private cost and social cost: Private cost is the cost borne by the producer or consumer directly involved in the transaction, while social cost includes both the private cost and any external costs imposed on others.
3. Recognize that a negative externality means there is an external harm or cost not accounted for by the private party, so social cost is higher than private cost.
4. Compare the options given: The correct description of a negative externality is that social cost exceeds private cost due to external harm imposed on others.
5. Conclude that the best answer is the one stating 'Social cost exceeds private cost due to external harm imposed on others,' as it correctly captures the essence of a negative externality.