An externality arises because of one agent's
A) consumption only
B) consumption or production
C) production only

Question

Quizplus · Accepted Answer

An externality can arise from both consumption or production activities of an economic agent. When the production or consumption of a good or service affects the well-being of a third party who is not directly involved in the transaction, then an externality occurs. Therefore, choice B is correct. Choices A and C are incorrect as they assert that externality arises only from consumption or production activities, respectively, which is not true.

An Externality Arises Because of One Agent's