Question

Which of these statements concerning externalities is correct? a There would be no justification for government involvement in the economy if it were not for externalities. b An externality can only arise when one person (or a small group of persons) has the ability to unduly influence market prices. c An externality arises when one person's actions have an impact on the well-being of others. d An externality can arise only when two or more countries are engaged in trade with one another.

Answer 1

Answer: Option (c) is correct.

Step-by-step explanation:

There are two types of externality:

(a) Positive externality

(b) Negative Externality

Externality refers to a cost or benefit to a person from the actions or activities of other person.

If a set of actions decreases the utility of the third person who is not included in the activity then it is a negative externality.

If a set of actions increases the utility of the third person who is not included in the activity then it is a Positive externality.