Economics • Economic BasicsEasy
Which of the following best defines 'Externalities' in microeconomics?
A. Costs or benefits incurred by third parties who are not directly involved in an economic transaction or production decision✓ Correct Answer
B. The total revenue generated from exporting goods to international markets
C. Financial subsidies provided by the government to external trade partners
D. The taxation imposed on multinational corporations operating outside their home country
💡 Solution & Explanation
Externalities in microeconomics are defined as uncompensated costs or benefits incurred by third parties who are not directly involved in an economic transaction or production decision. Unlike market pricing mechanisms, negative externalities like pollution impose spillover costs on society without matching compensation. Government interventions often seek to internalize these external effects through taxes or subsidies. Microeconomic definitions are crucial for analytical questions in economics.
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