Which of the following is the best example of an action that imposes an external cost?
A) Wear and tear on your car as the result of frequent use.
B) Deterioration in the average quality of a house you own as the result of poor maintenance.
C) Water pollution from an upstream factory that increases the cost of providing clean water to downstream residents.
D) A rose garden on your property from which your neighbor gets much enjoyment.

Question

Quizplus · Accepted Answer

The water pollution from the upstream factory is an example of a negative externality, where the cost of the factory's actions are not borne by them but by downstream residents who now have to pay more for clean water. This is an example of an external cost.

The other choices do not involve an externality where one party's actions impose a cost on another party. Wear and tear on your car and deterioration in quality of your house are both internal costs as they directly affect the owner. A rose garden on your property that gives enjoyment to a neighbor is a positive externality, but it does not impose an external cost on anyone.

Which of the Following Is the Best Example of an Action