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What are externalities, and how do they affect markets? What is the definition of an externality? any cost associated with a market activity influence on market activity by an outside party any benefit associated with a market activity a cost or benefit of market activity to an outside party.

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Answer:

What is the definition of an externality?

  • a cost or benefit of market activity to an outside party.

What are externalities, and how do they affect markets?

  • externalities distort markets by creating costs to outside parties or by benefiting outside parties.

Explanation:

There are positive and negative externalities.

Positive externalities occur when an economic transaction positively affects the well being of other people (or beings) that were not part of the transaction, e.g. a company installs solar panels to reduce the consumption of electricity, this action benefits not only the company but the whole environment.

Negative externalities occur when an economic transaction negatively affects the well being of other people (or beings) that were not part of the transaction, e.g. a company pollutes the air and the whole community suffers from the bad quality of the air.

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