Transactions that impose costs on parties not directly involved in the transaction represent
A) a market failure due to price distortion.
B) a form of public good, as the costs are shared with the public.
C) a market failure characterized by an externality.
D) government intervention to reduce income inequality.

Question

Quizplus · Accepted Answer

When a transaction imposes costs on parties not directly involved in the transaction, it leads to a market failure known as an externality. This is because market outcomes may not reflect the true costs of production or consumption activities. For instance, pollution from a factory may have a negative impact on the health of nearby residents, leading to increased healthcare costs. Thus, there is a need for government intervention, such as regulations or taxes, to internalize these costs and ensure that market outcomes are efficient.

Transactions That Impose Costs on Parties Not Directly Involved in the Transaction