OnRamps Economics College Practice Exam

Negative externalities arise when a market transaction imposes a cost on people who are not involved in the transaction. In this case, a factory releasing pollution creates social costs—health impacts, environmental damage, and cleanup—that neither the factory owners nor the consumers pay for in the market price. Those costs are borne by others, not by the parties directly involved in the sale of the product.

The other descriptions don’t fit as well. One describes a benefit to others (a positive externality), not a cost. Another is about whether a good is excludable, which relates to whether people can be kept from using it, not about third-party costs. The last describes taxes, which are government charges, not a spillover cost from the production or consumption of a good.