Which of the following scenarios best illustrates a negative externality?

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

Answer: (A)

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, while a negative externality imposes costs on others.
3. Step 3: Analyze each scenario to identify whether it involves external costs or benefits affecting third parties.
4. Step 4: Recognize that a factory emitting pollution imposes health costs on nearby residents, which are unintended and uncompensated effects—this is a classic example of a negative externality.
5. Step 5: Confirm that the other scenarios involve positive effects or private benefits without imposing external costs, so they do not illustrate negative externalities.