Economics • Economic BasicsEasy
Which of the following best characterizes the concept of 'Externalities' in welfare economics?
A. The internal cost incurred exclusively by a firm during the production process.
B. The uncompensated impact of an individual's or firm's actions on the well-being of a bystander.✓ Correct Answer
C. The total profit generated by a monopoly operating without government regulation.
D. The international trade imbalance caused by tariff barriers.
💡 Solution & Explanation
An externality represents the uncompensated cost or benefit imposed by an economic agent's actions on an uninvolved third party, leading to market failure when social and private costs diverge. Other choices like internal production costs are borne directly by the firm rather than external bystanders.
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