Which occurs when producing or consuming a good imposes a cost on a third party?

• A. Private Cost
• B. Negative Externality
• C. Social Cost
• D. Positive Externality

Answer: (B)

When producing or consuming a good imposes a cost on someone who isn’t part of the transaction, that extra cost is an external cost to others. If the impact on a third party is negative, it’s a negative externality. For example, a factory polluting a river makes nearby residents pay health or clean-up costs that aren’t included in the price of the factory’s product. Private cost is what the producer or consumer directly pays, while social cost is the total cost to society (private costs plus any external costs). If the effect on others was a benefit, it would be a positive externality. So the situation described fits negative externality.