Which of the following is an example of an externality?

• A. A restaurant charging customers for their meals
• B. A consumer purchasing a product for personal use
• C. A factory polluting a river, affecting nearby residents' health
• D. A firm paying wages to its employees

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of an externality. An externality occurs when a decision causes costs or benefits to third parties who are not directly involved in the transaction.
2. Step 2: Analyze each option to see if it involves third-party effects that are not reflected in market prices.
3. Step 3: For the restaurant charging customers, the transaction is between the restaurant and the customers, with no third-party effects, so this is not an externality.
4. Step 4: For a consumer purchasing a product for personal use, the effects are private to the consumer, so this is not an externality.
5. Step 5: For a factory polluting a river, the pollution affects nearby residents' health, who are third parties not involved in the factory's production or sale, making this an example of a negative externality.