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Q69 (CDS-II/2015) Economy › Basic Concepts & National Income › GDP measurement methodology Answer Verified

Which one of the following is not an example of externalities?

Result
Your answer: —  Â·  Correct: B
Explanation

An externality is defined as a cost or benefit accruing to an uninvolved third party as a result of an economic activity. It represents a link between agents that lies outside the price system [1]. Option 1 (factory pollution) and Option 3 (neighbor's vehicle smoke) are classic examples of negative externalities where production or consumption harms others without compensation [3]. Option 4 (land price increase due to a road) is a pecuniary externality, where market actions affect the welfare of others through the price system. However, Option 2 describes a health hazard caused by a person's own smoking. This is a private cost rather than an externality because the harm is borne by the individual making the choice, not an external party. While secondhand smoke is an externality, self-inflicted harm is considered an internal cost or 'internality' in behavioral economics.

Sources

  1. [1] Environment and Ecology, Majid Hussain (Access publishing 3rd ed.) > Chapter 6: Environmental Degradation and Management > GrEEn EconoMIcS. > p. 51
  2. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > National Income Identity for an Open Economy > p. 102
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