Which of the following is an example of an external cost?

• A. Air pollution from a factory affecting nearby residents
• B. A consumer enjoying a public park
• C. A homeowner planting trees that improve neighborhood air quality
• D. A company providing free training to its employees

Answer: (A)

Verified step by step guidance

1. Understand the concept of external costs: External costs, also known as negative externalities, occur when a third party suffers a cost due to the actions of others, without being compensated.
2. Analyze each option to identify if it imposes a cost on someone not directly involved in the activity:
3. Option 1: Air pollution from a factory affecting nearby residents — the factory's production causes pollution that harms residents who are not part of the factory's operations, representing an external cost.
4. Option 2: A consumer enjoying a public park — this is a positive externality or a public good benefit, not a cost imposed on others.
5. Option 3: A homeowner planting trees that improve neighborhood air quality — this is a positive externality, as it benefits others without imposing a cost.