When does an externality exist
A)when the government imposes a tariff and forces the market to adjust to a new equilibrium
B)when markets are not able to reach equilibrium
C)when a firm sells its product in a foreign market at the world price
D)when a person engages in an activity that influences the well-being of a bystander and yet neither one pays nor receives payment for that effect

Question

Quizplus · Accepted Answer

An externality exists when a person engages in an activity that affects the well-being of a bystander and neither party pays nor receives payment for that effect. This is because the market fails to take into account the full social costs or benefits of an activity, resulting in an inefficient allocation of resources. Choices A, B, and C do not accurately describe the definition of an externality.

When Does an Externality Exist