Final answer:
An activity that creates a negative consumption externality is smoking near bystanders as it affects their health without their consent. Negative externalities involve costs to society that are not paid by the producer or consumer, such as pollution from a factory, which leads to social costs like poor air quality affecting those not involved in the economic transaction.
Step-by-step explanation:
An example of an activity that creates a negative consumption externality is C) smoking, which harms the health of a bystander. This undesirable consequence to a third party is a type of externality wherein the cost of consumption is not borne by the producer or the consumer, but by others who were not involved in the transaction. Pollution as a Negative Externality serves as a pertinent example. When factories release pollutants into the air or water without bearing the full costs of their actions, it impacts the well-being of others. This situation can lead to overproduction relative to what would occur if producers were responsible for all associated environmental costs.
To further illustrate, if you're downwind of a manufacturing plant that emits pollutants, you suffer from poor air quality even though you did not engage in any transaction with the plant. The steel manufacturer might produce more goods than would be socially optimum because they do not pay for the external damage caused by pollution, compelling society at large to shoulder the burden.