Which of these statements concerning externalities is correct?
A)There would be no justification for government involvement in the economy if it were not for externalities.
B)An externality can only arise when one person (or a small group of persons) has the ability to unduly influence market prices.
C)An externality can arise only when two or more countries are engaged in trade with one another.
D)An externality arises when one person's actions have an impact on the well-being of others.

Question

Quizplus · Accepted Answer

An externality occurs when one person's actions have an impact on the well-being of others. This impact can be positive or negative and can affect people who are not directly involved in the transaction or decision-making process. Externalities can create market failures and there is often a justification for government involvement to address them. Choices A, B, and C are incorrect as they do not accurately describe the concept of externalities.

Which of These Statements Concerning Externalities Is Correct