An action creates an externality if it
A) Does not affect someone with whom the decision-maker has not engaged in a related market transaction
B) Affects someone with whom the decision-maker has not engaged in a related market transaction
C) Affects only those individuals engaged in the market transaction
D) Affects only those individuals not in the market transaction

Question

Quizplus · Accepted Answer

An externality is created when an action of a decision-maker affects someone with whom they have not engaged in a related market transaction. The impact of the action can either be positive or negative, and the affected person may not be compensated for the effects of the action.

An Action Creates an Externality If It