External costs refer to the costs that are not accounted for by the individuals or firms engaged in the market activity but are borne by other parties in the society, such as environmental pollution or traffic congestion. The difference between social and private costs is a measure of external costs. Therefore, option B is the best choice.

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External Costs Are

Question 5

Multiple Choice

External costs are

A) Domestic economic impacts of foreign events.
B) The difference between social and private costs of a market activity.
C) Outside costs that producers absorb.
D) Effects of government on the private sector.

Correct Answer: