Which of the following is an example of a negative externality?

• A. Pollution from a factory harming nearby residents.
• B. Vaccination reduces illness in the community.
• C. Traffic congestion caused by a new highway that delays others.
• D. Public park increases property values.

Answer: (A)

A negative externality occurs when an action imposes a cost on people who aren’t part of the decision or transaction. Pollution from a factory harming nearby residents is a classic example: the factory’s production creates health, environmental, and cleanup costs for people living nearby, but those costs aren’t reflected in the price of the factory’s output. Because the social cost is higher than the private cost, the market tends to overproduce pollution relative to the social optimum. The other options illustrate different ideas: vaccination reduces illness in the community (a positive externality), and a public park increasing property values also provides positive spillover benefits. Traffic congestion from a new highway can create negative externalities by delaying others, but the most straightforward and commonly cited example of a negative externality is pollution.