Question

If a person who generates a negative externality incorporates into his or her private cost-benefit calculations the effects that this externality will have on third parties, the externality has beena. substitutedb. accommodatedc. compoundedd. internalized

Answer 1

Answer: Option (d) is correct.

Explanation:

Correct option: Internalized

The negative externality is a type of cost that is suffered by the third party while doing an economic transaction between the first and second party.

If the third person is negatively affected by the transaction takes place between the two parties, then it is negative externality.

For example, smoking, loud sound system, garbage,etc.

So, if the polluter wants to pollute more then they have to buy more pollution rights by paying more money. This is known as internalize the pollution cost. Internalizing includes all the externality cost created by the polluter.