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

• A. Air pollution from a factory affecting nearby residents
• B. A homeowner planting trees that provide shade to neighbors
• C. A neighbor playing music that everyone enjoys
• D. A company providing free vaccinations to its employees

Answer: (A)

Verified step by step guidance

1. Understand the concept of an externality: An externality occurs when a third party is affected by the actions of others, without this effect being reflected in market prices.
2. Differentiate between positive and negative externalities: A positive externality benefits third parties, while a negative externality imposes costs on them.
3. Analyze each option to identify whether it imposes a cost or provides a benefit to others outside the decision-maker:
4. - Air pollution from a factory imposes health and environmental costs on nearby residents, which is a negative externality.
5. - Planting trees that provide shade benefits neighbors, which is a positive externality; playing enjoyable music benefits others (positive); providing free vaccinations benefits employees and potentially others (positive).