Question

Big Road Inc., a private company, is hired to build and run a state’s entire road system. The company charges high fees to use its roads. It maintains the roads only in heavily populated areas. Which of the following describes this project?

a. positive externality
b. public good
c. market failure
d. negative externality

Answer 1

The previous answer, D. NEGATIVE EXTERNALITY is incorrect. Do not choose this answer.

Answer 2

The above project is an example of D. NEGATIVE EXTERNALITY.

Negative externality is defined as the cost that is suffered by a third party as a result of an economic transaction.

First and second parties are Big Road Inc. and the state. The third party is the user of the states road system which Big Road Inc is hired to run. It is a negative externality because the road users are the ones paying a high price for the use of the roads.