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

Question

Quizplus · Accepted Answer

An externality occurs when an individual or firm engages in an activity that affects the well-being of others but does not incur the costs or receive the benefits of that activity. This means that the market does not take into account the full social costs or benefits of the activity, leading to a market failure. Choice A is incorrect because externalities demonstrate the need for government intervention to correct market failures. Choice B is incorrect because externalities can contribute to the failure of markets to reach equilibrium, but this is not the only reason for market failure. Choice C is irrelevant as selling a product in a foreign market is not related to externality.

An Externality Exists Whenever