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

• A. A neighbor planting flowers that improve the neighborhood's appearance
• B. A consumer purchasing a product at its market price
• C. Air pollution from a factory affecting nearby residents
• D. A company providing free vaccinations to its employees

Answer: (C)

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, and this effect is not reflected in market prices.
2. Step 2: Differentiate between positive and negative externalities. A positive externality benefits third parties (e.g., improved neighborhood appearance), while a negative externality imposes costs on third parties (e.g., pollution).
3. Step 3: Analyze each option to identify whether it creates external costs or benefits for others outside the transaction:
4. - Neighbor planting flowers: likely a positive externality (improves neighborhood appearance).
5. - Consumer purchasing a product at market price: no externality, as the transaction is private and priced.
6. - Air pollution from a factory: negative externality, as it harms nearby residents without compensation.
7. - Company providing free vaccinations: positive externality, as it may reduce disease spread benefiting others.
8. Step 4: Conclude that the example of a negative externality is the air pollution from a factory affecting nearby residents, because it imposes an external cost on others.