An externality arises when:
A)an economic good is produced by many firms.
B)the actions of a decision maker affect other decision makers in a way not reflected in the market price.
C)the actions of a decision maker do not affect other decision makers.
D)the market equilibrium is inefficient.

Question

Quizplus · Accepted Answer

An externality occurs when the actions of one economic agent affect the welfare of another agent in a way that is not reflected in market prices. In other words, the decision maker's actions have an impact on others that is not included in the market transaction. This can cause market outcomes to be inefficient and lead to deadweight loss. An externality occurs when the actions of one economic decision-maker affect the well-being of others in a way that is not reflected in market prices. This can lead to inefficiencies in the market and result in negative or positive impacts on those who were not involved in the original decision.

An Externality Arises When