Final answer:
The "third party" in a situation with an externality refers to individuals not directly involved in the transaction or activity; they are affected either positively or negatively by actions they didn't partake in.
Step-by-step explanation:
In a situation where an externality occurs, the "third party" refers to those who D. Are not directly involved in the transaction or activity. An externality impacts this third party who is external to the exchange, and it can be either a negative or a positive externality. If negative externalities are imposed, incorporating the social cost could incentivize a reduction in the production causing them. In the case of positive externalities, third parties receive external benefits without paying for them, which could lead to underproduction in the market since suppliers do not account for this unintended demand. Compensation for these benefits could encourage producers to increase production.