An externality
A)results in an equilibrium that does not maximize the total benefits to society.
B)causes demand to exceed supply.
C)strengthens the role of the "invisible hand" in the marketplace.
D)affects buyers but not sellers.

Question

Quizplus · Accepted Answer

An externality occurs when the production or consumption of a good or service affects someone who is not directly involved in the transaction. This leads to a market failure, in which the equilibrium does not maximize the total benefits to society. Therefore, option A is the correct answer. Option B is incorrect because an externality does not necessarily affect supply and demand. Option C is incorrect because an externality is a market failure and weakens the role of the "invisible hand" in the marketplace. Option D is incorrect because an externality affects both buyers and sellers.

An Externality