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 refer to the costs or benefits that result from the production or consumption of goods and services but are experienced by individuals or groups who are not directly involved in the transaction. These spillover effects can have either positive or negative impacts on third parties.
On the other hand, positive externalities occur when a transaction generates benefits for third parties. For instance, if a person invests in education and acquires valuable skills, not only does that individual benefit but society as a whole benefits from having a more educated and productive workforce.
