Which of the following is true of a negative externality?Group of answer choicesThe government can use subsidies to encourage firms to internalize the externality.The government must take over the production of this good so that the externality can be internalized.Some benefits accrue to a third party.Its existence always requires corrective measures by the government.Some costs are borne by a third party.
Question
Which of the following is true of a negative externality?Group of answer choicesThe government can use subsidies to encourage firms to internalize the externality.The government must take over the production of this good so that the externality can be internalized.Some benefits accrue to a third party.Its existence always requires corrective measures by the government.Some costs are borne by a third party.
Solution
The statement that is true of a negative externality is: "Some costs are borne by a third party."
Negative externalities occur when the consumption or production of a good causes a harmful effect to a third party. In this case, the third party bears some of the costs of the production or consumption of the good, even though they did not choose to be involved in that economic transaction. For example, pollution from a factory can negatively affect the health of people living nearby, who then bear the cost of that pollution through increased healthcare expenses.
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