Question

i. because of a subsidies from other countries, a developing country reduces output to the point where the country engages in the optimal level of pollution.
ii. unknown to canadians, factories in the united states generate acid rain that falls in canada, degrading wetland habitats.
iii. patent protection on a new anti-aids drug keeps the available quantity of the drug low relative to the need, and keeps the price unaffordably high for many sufferers around the world, especially in impoverished areas of africa.
what is a negative externality?
a i only
b ii only
c i and ii only
d ii and iii only

Explanation:

A negative externality is a cost imposed on third parties not involved in a transaction.

• Statement I: A developing country reducing output due to subsidies (affecting its own pollution level) is an internal decision, not a negative externality on others.
• Statement II: US factories generate acid rain that degrades Canadian wetlands/habitats. This imposes a cost on Canada (third party) not involved in the US factories' production decisions, so it is a negative externality.
• Statement III: Patent protection limiting drug supply/price affects consumers (who are part of the market for the drug, not third parties). It is a market restriction, not a negative externality.

So only Statement II is a negative externality.

Answer:

B. II only