An externality is:
A) A cost or benefit of a market activity that impacts a third party.
B) The private costs that are borne by an individual.
C) The cost of clean up paid for by the polluter.
D) A situation in which the government solution makes the outcome worse.

Question

Quizplus · Accepted Answer

An externality is a cost or benefit of a market activity that impacts a third party. It can be either positive or negative and is not reflected in prices. For example, pollution from a factory may impact the health of nearby residents, who are not directly involved in the production process. The cost of this pollution is not reflected in the price of the product, but is instead borne by the third party.

An Externality Is