07 Externalities

Question 1

External cost (negative externality)

Answer 1

Cost of an activity that falls on people other than those who pursue the activity

Question 2

Externality

Answer 2

An externality is the name given to an external cost or external benefit of an activity

Question 3

External benefit (positive externality)

Answer 3

A benefit of an activity received by people other than those who pursue the activity

Question 4

Externalities Affect Resource Allocation

Answer 4

Externalities reduce economic efficiency

• Solutions to externalities may be efficient
• When efficient solutions to externalities are not possible, government intervention or other collective action may be used