Question

Which of the examples below illustrates the economic principle of a negative externality? a. cost or benefit of a transaction that involves the buyer or seller when both parties lose money b. cost of transportation of goods from the site of production to a market c. cost of rebuilding roads damaged by trucks heavily loaded with goods d. cost of labor to produce a product

Answer 1

Answer:

C) cost of rebuilding roads damaged by trucks heavily loaded with goods

Explanation:

Externality is a microeconomic concept that aims to explain the positive or negative impact that an economic activity has on third parties. If by exercising an economic activity, a company indirectly benefits society or community, the externality is positive. If economic activity negatively impacts the surrounding community, externality is said to be negative.

For example, the pollution that an industry emits in the production process has deleterious effects throughout society, being a negative externality. Likewise, a truck causes potholes in the road, this is a negative externality, since all citizens' taxes, including most non-truckers, will be used to restore potholes in the roadway.