When consumption of a good or service produces benefits or costs that are not reflected in the market price for the good, this is known as a(n)
A)externality
B)common pool problem
C)nonexcludable resource
D)public good
E)renewable resource

Question

Quizplus · Accepted Answer

Externalities occur when there are spillover effects from the consumption or production of a good or service that affect third parties who are not directly involved in the transaction. These effects can be positive (e.g. a company investing in renewable energy benefits the environment) or negative (e.g. pollution from a factory harming nearby residents' health), but in either case they are not reflected in the market price and create a market failure that may require government intervention to address. The other options relate to different types of market failures related to the allocation of common resources, provision of public goods, and management of renewable resources, but do not capture the specific issue of externalities.

When Consumption of a Good or Service Produces Benefits or Costs