Question

An externality is defined as

A) an additional cost imposed by the government on producers.
B) an additional gain received by consumers from decisions made by the government.
C) a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer.
D) a marginal social cost.
E) the additional amount consumers have to pay to consume an additional amount of a good or service.

Answer 1

An externality is a cost or benefit affecting a party who did not choose to incur that cost or benefit. Option C correctly defines externalities, including both positive and negative types, and how they impact third parties not involved in the original transaction.

Step-by-step explanation:

An externality is a cost or benefit incurred by a third party who is not involved in the original transaction between a buyer and seller. When exploring this concept, we can see different scenarios.

For instance, a negative externality could be the pollution created by a factory, which affects the surrounding community's health and environment without them being a party to the creation or consumption of the goods the factory produces.

Positive externalities, on the other hand, could include the benefits a community receives from the presence of a well-maintained park, even though they don’t directly pay for its upkeep. In the context of the given options, Option C is the correct definition: 'a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer'.