Which of the following illustrates the concept of a negative externality?

• A. A company provides free training to its employees, improving their skills.
• B. A student receives a scholarship for academic achievement.
• C. A homeowner plants a garden that increases neighborhood property values.
• D. A factory emits pollution that harms the health of nearby residents.

Answer: (D)

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 involved in the decision-making process.
2. Step 2: Differentiate between positive and negative externalities. A positive externality provides benefits to others (e.g., improved skills, increased property values), while a negative externality imposes costs on others (e.g., pollution, noise).
3. Step 3: Analyze each option to identify whether it creates benefits or costs for third parties outside the transaction:
4. - Free training improves employees' skills, which is a positive externality.
5. - A scholarship benefits the student directly, with no external costs or benefits to others.
6. - A garden increasing neighborhood property values is a positive externality.
7. - Pollution from a factory harms nearby residents, imposing costs on third parties, which is a negative externality.