IB Economics HL Practice Test 2026 – Complete Exam Prep

Negative externalities refer to the adverse effects experienced by third parties as a result of the production or consumption of goods and services. This concept is integral in economics as it highlights situations where the actions of producers or consumers impose costs on others who are not directly involved in the transaction.

An example of a negative externality could be pollution generated by a factory. The factory may benefit from lower production costs, but nearby residents may suffer from health issues or reduced quality of life due to the pollution. In this case, the costs are not reflected in the market price of the products the factory sells, leading to an inefficient allocation of resources.

In contrast, positive externalities would indicate beneficial effects for third parties—such as immunizations that not only protect the individual receiving the vaccine but also contribute to herd immunity in the community. Public goods are those that are non-excludable and non-rivalrous, meaning they are available for everyone, such as national defense. Merit goods are goods that the government believes individuals will under-consume, like education or healthcare, creating positive outcomes for society.

Thus, the correct choice—negative externalities—accurately captures the idea of detrimental side effects that impact individuals who are not part of the economic transaction.