An externality occurs when:
A)people other than those making the demand and supply decisions share the benefits or the costs of an activity.
B)only the people making the demand and supply decisions share the benefits or the costs of an activity.
C)private costs of production equal the full social costs associated with production of a good.
D)private costs of production are ignored.

Question

An externality occurs when:
A)​people other than those making the demand and supply decisions share the benefits or the costs of an activity.
B)​only the people making the demand and supply decisions share the benefits or the costs of an activity.
C)​private costs of production equal the full social costs associated with production of a good.
D)​private costs of production are ignored.

Quizplus · Accepted Answer

An externality occurs when the costs or benefits of a market activity are borne by individuals or groups other than those who undertake the activity. In other words, people other than those making the demand and supply decisions share the benefits or costs of the activity. This can lead to market inefficiencies and the need for government intervention. The other options are incorrect as they do not describe the concept of externality accurately.

An Externality Occurs When