An external cost:
A) causes markets to allocate resources efficiently.
B) affects producers but not consumers.
C) is a cost paid by people other than the producer or consumer trading in the market.
D) leads to economic efficiency only when private costs are greater than external costs.

Question

Quizplus · Accepted Answer

An external cost is a cost that is paid by people other than the producer or consumer trading in the market. It is also known as a negative externality because it imposes costs on third parties who are not involved in the market transaction. External costs lead to market failure because they are not reflected in the market price, causing overproduction and a loss of economic efficiency.

An External Cost