What best describes a negative externality?

• A. A negative externality occurs when the production of a good benefits others.
• B. Negative externalities occur when a transaction has a cost that neither buyer nor seller are forced to pay. For example, a factory may release air pollution into the environment, incurring large social costs that neither the factory owners nor the consumers purchasing their product pay.
• C. A negative externality occurs when a good is excludable.
• D. Negative externalities occur when a consumer pays taxes.

Answer: (B)

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.