Question

If plumes of exhaust from passing busses are inhaled by bicyclists, a _____________ externality is being imposed on ___________.

A) positive; bus riders

B) negative; bus riders

C) positive; bicyclists

D) negative; bicyclists

Answer 1

When action of one individual creates loss to others but people who get loss due to that person action, does not receive any compensation from that person, then it is called negative externality. So private market equilibrium will be determined by the intersection of the MPC and MSB. So social optimum will be determined by the intersection of the MSC and MSB.

The private market equilibrium

MPC=MSB

The social optimal equilibrium

MSC=MSB

In case of negative externality social cost is greater than the private cost.

If plumes of exhaust from passing busses are inhaled by bicyclists, a negative externality is being imposed on bicyclists.

Hence option d is the correct answer.