The existence of an externality is proof that there is a(n):
A) market failure.
B) undervaluation of a good.
C) undervaluation of a cost.
D) property dispute.
E) free-rider problem

Question

Quizplus · Accepted Answer

An externality occurs when the actions of one economic agent affect the well-being of another agent without any compensation or payment for that effect. This leads to a market failure as the market is unable to efficiently allocate resources to their highest valued uses. Therefore, the correct answer is A - market failure.

The Existence of an Externality Is Proof That There Is