An externality exists whenever
A)the economy can benefit from government intervention.
B)markets are not able to reach equilibrium.
C)a firm sells its product in a foreign market.
D)a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.

Question

Quizplus · Accepted Answer

An externality occurs when the actions of one person or firm have an impact on the well-being of a third party, who is not compensated for that impact. This can result in negative externalities, such as pollution, or positive externalities, such as education or vaccination. Since the person or firm responsible for the externality does not pay for the costs or receive the benefits of their actions, the market fails to take these effects into account and results in an inefficient outcome. Thus, externalities provide a rationale for government intervention to correct the market failure.

An Externality Exists Whenever