An externality is defined as

Question

Quizplus · Accepted Answer

An externality is a byproduct of a good or activity that affects someone not immediately involved in the transaction. It can be a positive or negative impact on a third party that is not reflected in the price of the good or service being exchanged. For example, pollution from a factory affects people living nearby but is not reflected in the cost of the product being produced.

Answer: C 
 An externality can also refer to an additional cost of consumption that is borne by a third party. For example, smoking not only damages the health of the smoker but also those exposed to second-hand smoke. The cost of treating illnesses from smoking is often borne by society as a whole, not just the smoker. This is an example of a negative externality.

An Externality Is Defined as