Question

What is a negative externality? Group of answer choices 1. Harm from economic activity that affects persons not involved in the economic transaction 2. Benefit from economic activity that affects persons not involved in the economic transaction 3. Occurs only when one seller has all the market power 4. Occurs only when people act without the benefit of all relevant information

Answer 1

Answer:

Option 1 is correct.

Explanation:

There are two types of externality:

(i) Negative externality

(ii) Positive externality

Negative externality:

Suppose there is an economic transaction initiated between the two partners and this transaction reduces the consumption of third person, then this is known as the negative externality.

For example: Smoking is one of the example of negative externality. Smoking a cigarette is not only present in the consumption bundle of a person who smokes but it also affects the health of the other person who stands near that person. So, it reduces the consumption of non smoker.