Define externality and give examples of positive and negative externalities.

Define externality and give examples of positive and negative externalities.

• A. A side effect not reflected in market prices; positive externality example: vaccination; negative externality example: pollution.
• B. Externalities are always negative and require government intervention.
• C. Externalities are private costs borne by the producer; example: labor costs.
• D. Externalities occur when buyers take into account external costs in price.

Answer: (A)

Externalities are unintended side effects of economic activity that market prices don’t capture. They can be positive or negative. A positive externality occurs when benefits spill over to others, such as vaccination, which protects the whole community by reducing disease spread. A negative externality happens when costs fall on people who aren’t involved in the transaction, like pollution that harms nearby residents and imposes cleanup costs on society. This definition with those examples is why the option is best: it directly describes externalities and gives concrete illustrations of both positive and negative cases. It would be incorrect to say externalities are always negative, or that they are private costs borne by the producer, or that they occur only when buyers account for external costs in price, because those descriptions misstate how externalities affect market prices and social costs.

Externalities are unintended side effects of economic activity that market prices don’t capture. They can be positive or negative. A positive externality occurs when benefits spill over to others, such as vaccination, which protects the whole community by reducing disease spread. A negative externality happens when costs fall on people who aren’t involved in the transaction, like pollution that harms nearby residents and imposes cleanup costs on society. This definition with those examples is why the option is best: it directly describes externalities and gives concrete illustrations of both positive and negative cases. It would be incorrect to say externalities are always negative, or that they are private costs borne by the producer, or that they occur only when buyers account for external costs in price, because those descriptions misstate how externalities affect market prices and social costs.