ICAEW SE · Chapter 2 · Question 6 of 13
A chemicals factory discharges waste into a river, harming fishing businesses and communities downstream. The factory does not pay for this harm. In economic terms, what is this an example of?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) A negative externality
Explanation
A negative externality is a cost imposed on third parties that is not reflected in the price paid by the producer or consumer. Because the factory does not bear the cost of the pollution, the market under-prices its activity, which is one reason regulation and environmental taxes are used. A positive externality would be a benefit to third parties.
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