What type of externality occurs when an economic activity has a spillover cost affecting non-participants?

The correct choice is associated with a situation where an economic activity imposes costs on third parties who are not directly involved in that activity. This is known as a negative externality. A classic example is pollution from a factory that affects the health and property values of nearby residents; these individuals suffer consequences without being part of the transaction between the factory and its customers.

Negative externalities typically lead to market failures because the costs borne by society are not reflected in the market prices of goods or services. This misalignment can cause overproduction of the goods or services creating the externality, as producers do not account for the broader impacts of their activities. Addressing negative externalities often involves government intervention, such as taxes or regulations, to align private costs with social costs and promote a more efficient outcome for the whole society.

In contrast, the other options presented refer to different concepts. A positive externality occurs when an economic activity benefits third parties; a public good refers to a commodity that is non-excludable and non-rivalrous; and social cost encompasses both private costs and external costs, but does not specifically highlight the aspect of affecting non-participants, which is central to the definition of a negative externality.