What defines a negative externality?

A negative externality is defined as an unintended cost of economic activity that is not reflected in the price mechanism. This occurs when the actions of individuals or businesses lead to adverse effects on third parties who are not involved in the transaction. A common example of a negative externality is pollution from a factory, which can harm the health of nearby residents and degrade the environment without the factory having to pay for these external costs.

The essence of option B highlights that the costs of such externalities are not captured in the prices of goods or services, meaning that the true economic burden of the activity is not reflected in market transactions. This misalignment creates market failures, as the social costs (including negative externalities) exceed the private costs borne by producers or consumers.

In contrast, the other choices describe scenarios that do not align with the concept of negative externalities. Positive outcomes or financial benefits do not address the unintended costs associated with externalities. Therefore, only the option highlighting the unintended costs not accounted for in the price mechanism accurately captures the definition of a negative externality.