Question

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

Select one: 

a. pollution from the chemical plant located near your house 

b. a defective auto part that causes your car to break down 

c. loud noises from your neighbor's late night parties 

d. fertilizer from a commercial farm that is carried to your yard during rains

Answer 1

When action of one individual creates loss to others but people who get loss due to that person action, does not receive any compensation from that person, then it is called negative externality. So private market equilibrium will be determined by the intersection of the MPC and MSB. So social optimum will be determined by the intersection of the MSC and MSB.

In case of negative externalities, the social optimum quantity of production of goods will be less than the private market equilibrium quantity. The social optimum price will be greater than the private optimum price.

Since a defective auto part that causes the car to break down is not action of third party individual which is creating loss to the car owner. Hence this is not an example of negative externality.

But all other statement are example of negative externality.

Hence option b is the correct answer.