An externality is a cost or benefit that affects a third party who did not choose to incur that cost or benefit. It is not a private cost or benefit because it extends beyond the parties involved in the transaction. This can result in market failure and inefficiency.

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An Externality

Question 97

Multiple Choice

An externality

A) enhances the efficiency of the market system.
B) is not an economic problem because it is external to the market.
C) is a private cost or benefit.
D) accrues to someone who had nothing to do with the production or consumption of a good or service.
E) refers to some unexpected change in the equilibrium price or quantity of a product.

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