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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.

B- Neighboring stores get more foot traffic.

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C- The city government collects added tax revenue.

D- The old bakery down the street loses some customers.


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.

  1. The working of a factory may cause environmental pollution (air, water), but no penalty is charged.
  2. 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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