Which of the following is an externality ?

Something that occurs in the great outdoors.

A by-product where the market does specify a price for the by-product.

Something that occurs inside the plant of a company.

A by-product where the market cannot specify a price for the by-product.

1 answer

An externality is best described as a by-product where the market cannot specify a price for the by-product. This is because externalities occur when the actions of individuals or companies have effects on third parties that are not reflected in market prices. For example, pollution from a factory may harm the environment or people's health, but those costs may not be paid by the factory, leading to an unmeasured impact on society. Thus, the correct choice is:

A by-product where the market cannot specify a price for the by-product.

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