How is an externality defined ?
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Answer: E. The uncompensated impact of one person’s actions on the well-being of a bystander
Explanation
An externality is the uncompensated impact of one person actions on a bystander. Market participants do not pay or receive compensation for these external effects. Externalities create discrepancies between private costs and social costs in market transactions. Externalities can be positive, such as education, or negative, such as pollution. A lack of property rights often contributes to the persistence of market externalities. Externalities represent a classic form of market failure requiring government intervention.
Environmental policies often use taxes or cap-and-trade systems to internalize negative externalities. Public health vaccination programs generate positive externalities that benefit the entire community. Recognizing externalities helps economists design better regulatory frameworks for public welfare. Option A refers to internal buyer benefits accounted for within market transactions. Option B refers to internal seller costs accounted for within market transactions. Option D describes advisory service fees rather than uncompensated third-party impacts.
Related questions
Q1. What is the consequence of rising expected inflation ?
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Answer: D. Shifts the Short run Phillips curve upward and the unemployment inflation trade-off is less favorable
Higher expected inflation shifts the short run Phillips curve upward to a higher level. An upward shift worsens the short run trade off between inflation and unemployment rates. Workers and firms adjust price expectation...
Q2. What is the expected outcome of a rise in income ?
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Answer: B. shift demand for an inferior product inward
Higher consumer income causes the demand for inferior products to shift inward. Consumers substitute away from inferior goods toward normal goods as wealth grows. Demand curves for inferior goods move leftward when aggre...
Q3. What will an increase in aggregate demand produce if aggregate supply is completely inelastic ?
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Answer: A. increase price but not output
When aggregate supply is completely inelastic, total output cannot expand beyond capacity. An increase in aggregate demand therefore drives up the overall price level exclusively. Vertical aggregate supply curves mean no...
Q4. What factor is most likely to trigger an increase in investment ?
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Answer: C. A decrease in the marginal propensity to consume
A decrease in the marginal propensity to consume means households save less, shifting funds toward spending and investment.
Q5. What is the impact of a rise in income ?
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Answer: C. Shift the demand curve
A rise in income changes purchasing power and shifts the entire demand curve outward. Consumers buy more of normal goods at every given price when income increases. Changes in non-price determinants of demand always caus...
Q6. What is the effect of rising costs ?
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Answer: B. Shift aggregate supply
Rising production costs increase the expense of output at every price level. Higher input costs shift the aggregate supply curve upward and leftward. Supply-side shocks reduce total national production capacity temporari...