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CMA Foundation · Fundamentals of Business Economics and Management · Economic and Business Environment

A chemical factory discharges untreated waste into a river, harming fishermen downstream who receive no compensation, while the factory's private costs stay low. In economic terms, this situation is an example of:

This is a negative externality in production. The factory's activity imposes pollution costs on fishermen who are not part of the transaction and are not compensated, so social cost exceeds the firm's private cost. The cost is external, not internalised by the polluter.

  1. AA positive externality in consumption
  2. BA public good being provided
  3. CA negative externality in productionCorrect
  4. DPerfect internalisation of cost

Explanation

The factory imposes a cost on third parties that is not reflected in its own costs, which is a negative externality arising from production. Social cost exceeds private cost. It is not internalised because the polluter bears none of the damage.

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