Which of the following conditions is most likely to result in a negative externality, where social costs exceed private costs?

• A. A consumer purchases a product at its market price.
• B. A company provides free vaccinations to its employees, reducing disease spread.
• C. A government subsidizes renewable energy production.
• D. A factory emits pollution that affects nearby residents without compensating them.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of externalities. An externality occurs when a third party is affected by the actions of others, and this effect is not reflected in market prices.
2. Step 2: Differentiate between positive and negative externalities. A negative externality happens when social costs exceed private costs, meaning the activity imposes additional costs on society that the producer or consumer does not pay for.
3. Step 3: Analyze each option to identify if the activity imposes external costs or benefits on others. For example, purchasing a product at market price typically reflects private costs, so no externality is implied.
4. Step 4: Recognize that activities like providing free vaccinations or subsidizing renewable energy usually generate positive externalities, as they benefit others beyond the direct consumer or producer.
5. Step 5: Identify that a factory emitting pollution without compensating affected residents creates a negative externality because the social cost of pollution (health, environment) is higher than the private cost borne by the factory.