CA Foundation · Business Economics · Public Finance
A chemical factory discharges effluents into a river, harming downstream fishermen who receive no compensation. In economic terms, this situation is best described as:
This is a negative externality in production. The factory's activity imposes uncompensated costs on downstream fishermen, who are third parties to the transaction, so social cost exceeds private cost and the factory produces more than the socially optimal output.
- AA positive externality in consumption
- BA negative externality in productionCorrect
- CA public good problem of non-excludability
- DA merit good problem of under-consumption
Explanation
The factory's production imposes a cost on third parties (fishermen) that is not reflected in its private costs. This is a negative externality in production. Positive externalities involve external benefits, which are not present here.
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