A negative externality arises when a person engages in an activity that has
A)an adverse effect on a bystander who is not compensated by the person who causes the effect.
B)an adverse effect on a bystander who is compensated by the person who causes the effect.
C)a beneficial effect on a bystander who pays the person who causes the effect.
D)a beneficial effect on a bystander who does not pay the person who causes the effect.

Question

Quizplus · Accepted Answer

A negative externality occurs when an individual or firm engages in an activity that has a harmful effect on a third party, who is not compensated for that harm. Option A reflects this definition, as the bystander is not compensated by the person who caused the adverse effect. The other options describe either a beneficial effect or compensation for the bystander, which do not fit the definition of a negative externality.

A Negative Externality Arises When a Person Engages in an Activity