Question
A cost or benefit of a good imposed on people other than the consumers or producer of a good is called a(n): a. externality. b. merit good. c. public good. d. private good.
Ask by Wagner Colon. in the United States
Jan 24,2025
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Answer
An externality is a cost or benefit affecting people other than the consumers or producers.
Solution
The correct answer is:
a. externality.
An externality refers to a cost or benefit that affects a third party who did not choose to incur that cost or benefit. This can occur in various situations, such as pollution from a factory affecting the health of nearby residents, which is a negative externality. Conversely, a positive externality might occur when someone’s education benefits society as a whole.
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An externality occurs when the actions of individuals or businesses have unintended side effects, impacting others who are not part of the transaction. For example, pollution from a factory can harm the health of nearby residents, creating a negative externality that isn't reflected in the cost of the product being manufactured. In real life, externalities affect various sectors. A classic illustration is the use of education; when one person gets more education, it often raises the overall education level in the community, benefiting everyone—this is a positive externality, as it leads to a more informed and productive society.
