Question : Externalities refer to:
Option 1: Costs or benefits that spill over to third parties not directly involved in a transaction
Option 2: Costs or benefits incurred by the government
Option 3: Costs or benefits incurred by businesses only
Option 4: Costs or benefits incurred by consumers only
Correct Answer:
Costs or benefits that spill over to third parties not directly involved in a transaction
Solution : The correct answer is (a) costs or benefits that spill over to third parties not directly involved in a transaction.
Externalities are unintended consequences of economic activities that affect individuals or entities not directly involved in the production or consumption of goods or services. These costs or benefits can be positive or negative and are often incurred by individuals, communities, or the environment.
Positive externalities occur when an economic activity generates benefits for third parties. For example, if a company invests in research and development and develops a new technology, the resulting knowledge and innovations may spill over to other firms in the industry, leading to increased productivity and economic growth.
Negative externalities occur when an economic activity imposes costs or harms on third parties. For instance, pollution generated by industrial production can harm the health of nearby communities or damage ecosystems, imposing costs on individuals or society as a whole.
