Question

What is an​ externality? A. A fixed or variable cost incurred by firms to produce a good or service. B. The combined benefit and cost to those directly involved in production and consumption of a good or service. C. The ability of an​ individual, a​ firm, or a country to produce a good or service at a lower opportunity cost than other producers. D. The highest valued alternative that must be given up to engage in an activity. E. A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

Answer 1

Answer:

Option (E) is correct.

Explanation:

There are two types of externality:

(a) Positive externality

(b) Negative externality

Negative externality is an externality which indirectly reduces the consumption of the third person who is not involved in the ongoing activity between the two person.

For example, smoking. If one person smokes then this will not only affect that person who smokes but also affect the persons who are near to him. Hence, this will reduces the utility of that person who is not involved in this activity.