Which of the following is an example of a negative externality that can adversely affect a firm's operations?

• A. Air pollution from a nearby factory that increases the firm's cleaning costs
• B. A technological innovation that reduces production costs for all firms
• C. A neighboring business hosting a community event that attracts more customers
• D. A government subsidy for renewable energy

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of a negative externality. A negative externality occurs when an activity imposes a cost on a third party who is not involved in the transaction or decision, leading to adverse effects on others' welfare or operations.
2. Step 2: Identify the options that describe external effects impacting a firm's operations. Look for situations where the firm's costs or productivity are negatively affected by external factors beyond its control.
3. Step 3: Analyze the option 'Air pollution from a nearby factory that increases the firm's cleaning costs.' This describes a situation where pollution (an externality) causes additional expenses for the firm, which is a classic example of a negative externality.
4. Step 4: Contrast this with other options: a technological innovation reducing costs is a positive externality; a neighboring business attracting customers is a positive spillover; a government subsidy is a policy intervention, not an externality.
5. Step 5: Conclude that the negative externality example is the air pollution increasing cleaning costs, as it imposes an external cost on the firm, adversely affecting its operations.