Question

An externality is an event which

a. is external to economics.
b. always brings harm to someone in the economy.
c. is incidental to some market activity.
d. harms the economy as a whole rather than a particular person.

Answer 1

An Externality is an event which is

C: incidental to some market activity.

Incidental to market activity means, that the company or individual may either come across a cost or a profit in response to making a product or service in the market or taking any decisions within its premises.

For example, a company produces something in its factory or plant, so with the result of the production, they may generate the air pollution. That is an external event happening because of them. So they have to make the health and clean up cost on the whole society. This is the externality cost.

Similarly, there are positive externalities. For example if a person gets treated of the contagious disease, others are benefited by his treatment.

Answer 2

Any market activity, along with its production chain, from extraction and production, to distribution and retail have incidental consequences in the social and natural environment it contacts.

These consequences, when it affects parties which did not choose to incur in these consequences (external parties), are called externalitites.

There can be positive and negative externalities, but naturally the one we hear most are the negative ones, as they should be "internalized" by the responsible party.

For example, a beefarm might bring a positive externality to fruit tree owners around it, through polinization. But the same way, the increase in bee attack in the region would be a negative externality.