An externality will:
A)usually be characterised as a form of market failure
B)cause markets to allocate resources efficiently
C)strengthen the role of the 'invisible hand' in the marketplace
D)always require the producer to compensate society

Question

Quizplus · Accepted Answer

An externality refers to the impact of an economic activity on parties other than the ones involved in the market transaction. It causes a divergence between private and social costs or benefits, leading to market failure. Therefore, the correct choice is A, which states that it is usually characterized as a form of market failure. The other choices are incorrect. B is wrong because externality affects market efficiency. C is incorrect because externality challenges the role of the invisible hand in achieving optimal allocation. D is not true because producers may not compensate society for the harm caused by externalities.

An Externality Will