Which of the following defines a negative externality?

Answer

D. The presence of an external cost

Explanation

In some transactions, there are often unintended impacts on people who are not directly involved in the transaction. These impacts are known as externalities. Negative externalities refer to situations where the impact on third parties is negative, such as pollution caused by a manufacturing plant. While the firm itself pays for the cost of production and pollution, the society around the plant incurs an additional cost in the form of medical expenses and other negative effects of pollution. Thus, negative externalities can be defined as the presence of external costs that are borne by parties not directly involved in the transaction. It is important to address negative externalities to ensure that all parties involved in a transaction are held accountable for the costs they impose on others, and to ensure that negative impacts on society and the environment are minimized.