An externality is something that affects more than one person. An externality can be positive or negative. For example, a paper mill supplies products we use everyday like toilet paper, paper towels, and so on. This paper mill affects many people positively. However that same paper mill puts a lot of pollution into the air negatively affecting everyone who needs air to live. The correct answer to your question is the second option (a conversation that annoys people nearby.
Good luck!