Question

An externality is a cost or benefit arising from an economic activity that falls on

A) consumers but not producers.
B) producers but not consumers.
C) consumers or producers.
D) someone other than consumers or producers.
E) none of the above.

Answer 1

The correct answer is D) someone other than consumers or producers, as an externality impacts a third party not directly involved in an economic exchange, leading to either negative costs to society or positive benefits.

Step-by-step explanation:

An externality is a cost or a benefit that arises from an economic activity and impacts a third party who is neither the consumer nor the producer involved in the exchange. Specifically, the correct answer to the question 'An externality is a cost or benefit arising from an economic activity that falls on' is D) someone other than consumers or producers.

Negative externalities, such as pollution, impose costs on society that are not borne by the parties directly involved in the transaction. Contrarily, positive externalities, like the benefits of education or vaccination, provide benefits to third parties who did not pay for the good or service that generated the benefit. To address these externalities, command-and-control regulation or market-based solutions such as taxes and subsidies are often implemented to align private incentives with social welfare.