When does an externality occur?
A) when one person's production or consumption of a good affects another person
B) when a producer's long-run average costs fall
C) when a consumer's marginal utility from consuming a good increases
D) when international trade leads to improvement in a country's economic welfare

Question

Quizplus · Accepted Answer

An externality occurs when one person's production or consumption of a good affects another person. This can be a positive or negative effect, and it is not reflected in the market price of the good. For example, pollution from a factory affects the health and well-being of people living nearby, but the cost of this pollution is not paid by the factory owner.

When Does an Externality Occur