A new bakery opens downtown. Which circumstance would most likely be a negative externality?
A- Customers of the old bakery see a drop in prices.
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B- Neighboring stores get more foot traffic.
C- The city government collects added tax revenue.
D- The old bakery down the street loses some customers.
Explanation
Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This causes social costs to exceed private costs.
- The working of a factory may cause environmental pollution (air, water), but no penalty is charged.
- The use of fossil fuels like coal, petroleum etc in factories leads to depletion of these non renewable resources, which has major ecological impact.
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