Final answer:
Externalities are defined as unintended consequences of economic activities that affect third parties, and they can be both positive and negative. These effects influence individuals or the environment that are not direct participants in the transaction.
Step-by-step explanation:
Externalities in market activities can be defined as consequences that affect third parties who are not directly involved in a transaction. These can be either positive effects such as enhanced neighborhood aesthetics due to someone's well-kept garden, or negative impacts like pollution from a factory affecting nearby residents. The correct answer to the question is c) Both positive and negative effects.
An externality is thus an impact on individuals or the environment that arises from economic activity where the individual or environment is not directly involved in the transaction. For example, when a company builds a dam, it may generate electricity (the intended consequence) but also cause environmental changes that can be either positive (creating a recreational lake) or negative (disrupting ecosystems). In cases of negative externalities, like pollution, if the parties had to account for the broader social costs, they might reduce their harmful activities. Conversely, if parties could be compensated for positive externalities they generate, such as the increased enjoyment from someone's public art installation, they could be encouraged to produce more of these benefits.