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) a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives payment for that effect.

Question

Quizplus · Accepted Answer

An externality occurs when the actions of one person or entity affect the well-being of a bystander, either positively or negatively, and neither party pays or receives compensation for that effect. This can result in market inefficiencies and a suboptimal allocation of resources.

An Externality Exists Whenever