ACCA Applied Knowledge · Business and Technology · Sustainable business practices
A company's factory discharges waste into a river. Local residents bear clean-up and health costs, while the company does not pay them. What is this an example of?
This is a negative externality: a cost of the company's activity falls on third parties, the residents, rather than on the company. Because the firm does not pay for the pollution damage, the social cost of production exceeds its private cost, which is the key idea behind environmental accountability.
- AA negative externalityCorrect
- BA positive externality
- CAn opportunity cost
- DA sunk cost
Explanation
Costs imposed on third parties that are not borne by the producer are negative externalities. A positive externality would be an unpaid benefit. Opportunity and sunk costs do not describe costs shifted onto others.
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