Question

Which of the following is an example of a negative externality (additional social cost)?

A. An increase in the value of land you own when a nearby development is completed
B. The costs paid by a company to build an automated factory
C. Failing property values in a neighborhood where a disreputable nightclub is operating
D. The higher price you pay when you buy a heavily advertised product

Answer 1

A negative externality example is the falling property values in a neighborhood due to a problematic nightclub, where the social costs are borne by others, not involved in the nightclub's business activities.

Step-by-step explanation:

An example of a negative externality is scenario C. Failing property values in a neighborhood where a disreputable nightclub is operating. A negative externality occurs when an economic activity imposes additional social costs on others who are not part of the transaction, leading to a loss in their well-being without compensation.

In this case, the operations of the nightclub may lead to increased noise, crime, or other undesirable conditions, which negatively affect the neighboring properties' values. This is in contrast to the other scenarios provided, which either do not fit the definition of an externality or represent a positive externality, such as scenario A.