ACCA Applied Knowledge · Business and Technology · Environmental and sustainability factors
Which of the following is the best example of a negative externality arising from a business's operations?
A chemical plant polluting a river and harming downstream fishing businesses is a negative externality, because the cost falls on third parties who are not compensated. Higher wages, supplier price rises and machinery investment are costs or decisions within normal market transactions.
- AA chemical plant discharges waste into a river, harming fishing businesses downstream that receive no compensationCorrect
- BA retailer pays higher wages to attract skilled staff
- CA supplier raises prices because its raw material costs have risen
- DA company invests in new machinery to increase output
Explanation
A negative externality is a cost imposed on third parties who are not compensated and are outside the transaction. Polluting a river harms downstream fishers in this way. The other options involve costs or decisions borne within the business or market transaction.
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