Question

The term externalities refers to Select one: a. regulations imposed on a firm by government. b. a nation that is a trading partner of another nation. c. the costs of production that are incurred by society. d. tariffs imposed on American goods exported to other countries. e. None of these answers is correct.

Answer 1

Answer:

Option (c) is correct.

Explanation:

During an economic activity between the two parties, if the third party is affected (Positively or negatively) by this economic transaction then this is known as externality.

There are two types of externalities:

(i) Positive externality: When the third party is positively affected by an economic transaction between the two parties.

(ii) Negative externality: When the third party is negatively affected by an economic transaction between the two parties.

Now, suppose there is a steel manufacturing company for the consumers. But the people who lives near this company have to bear the cost of the pollution created by the company. This is a negative externality.