An externality is present in a free market whenever:
A) a monopolist spends funds to keep potential competitors out of the market.
B) an activity generates costs or benefits that are not reflected in market prices.
C) firms hire employees from outside the firm to fill positions normally filled by promotion from within the firm.
D) a tax is imposed on the supplier of a good.

Question

Quizplus · Accepted Answer

An externality occurs when an activity affects third parties and these effects are not captured in the market prices, leading to market failure.

An Externality Is Present in a Free Market Whenever