Question

What is negative externality? In what ways do the existence of negative externalities justify the extra regulatory attention received by financial institutions?

a) Unintended harmful effects on third parties, justifying stricter oversight
b) Positive effects on the economy, justifying reduced regulation
c) Market efficiencies, justifying a hands-off approach
d) External benefits, justifying minimal regulatory attention

Answer 1

Negative externality is when an exchange between a buyer and seller has a harmful impact on a third party. The existence of negative externalities justifies extra regulatory attention by financial institutions to minimize the harm caused to third parties.

Step-by-step explanation:

An externality occurs when an exchange between a buyer and seller has an impact on a third party who is not part of the exchange. It can have a negative or positive impact. A negative externality occurs when the impact is harmful to the third party, while a positive externality is when the impact is beneficial. In the case of negative externalities, like pollution from a power plant, the existence of these unintended harmful effects justifies extra regulatory attention by financial institutions to minimize the negative impact on third parties.