Which of the following is not an example of an externality?
A) Drunk drivers raise everyone's auto insurance premiums.
B) The price of lumber increases as lumberjacks' wages increase.
C) The neighbour's beautiful front yard increases your home value.
D) Someone drives a car that emits thick black smoke.

Question

Quizplus · Accepted Answer

An externality is an effect on a third party that is not accounted for by the producer or consumer involved in a transaction. Option B is not an example of an externality as it is a result of market forces of supply and demand rather than an external effect on a third party. The other options involve external effects on third parties - drunk drivers increase insurance premiums for all, a neighbor's beautiful yard increases the value of your property, and a car emitting smoke pollutes the air and affects the health of nearby individuals.

Which of the Following Is Not an Example of an Externality