An externality occurs when:
A)people other than those making the demand and the supply decisions share the benefits or the costs of an activity.
B)people enjoy the benefits of a good or a service without paying for it.
C)the private cost of production equals the social cost associated with the production of a good.
D)a firm is unable to lower its average cost of production by expanding its output level.
E)the government intervenes in the production and the distribution of a good and does not allow the market forces to perform efficiently.

Question

Quizplus · Accepted Answer

An externality occurs when people other than those making the demand and supply decisions share the benefits or the costs of an activity. This can lead to market failure as the market may not take into account the full social costs and benefits of the activity.

An Externality Occurs When