What is an example of negative externality?

• A. Regulatory compliance costs for businesses
• B. Pollution resulting from industrial activity
• C. Growth in renewable energy sectors
• D. Technological innovations in manufacturing

Answer: (B)

A negative externality occurs when an economic activity imposes costs on third parties who are not directly involved in the transaction. Pollution resulting from industrial activity is a prime example of a negative externality because it negatively impacts the environment and public health without the polluting firms having to compensate those affected. When industries release pollutants into the air, water, or land, they create adverse effects that may lead to health problems, environmental degradation, and reduced quality of life for individuals living nearby. These costs are typically not reflected in the market price of the products produced, resulting in overproduction and inefficiencies in the market.

In contrast, regulatory compliance costs for businesses represent the expenses incurred by companies to comply with laws and regulations but do not directly affect third parties in the same way as pollution. Growth in renewable energy sectors and technological innovations in manufacturing are generally viewed as positive developments that can lead to environmental benefits and economic growth rather than imposing negative effects on society.