Question

An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a ________ externality.

a. Positive
b. Negative
c. Both a & b.

Answer 1

The correct answer is letter "A": Positive.

Step-by-step explanation:

Externalities are defined as situations in which a third party is affected by the actions of an individuals or organization without the third party to be involved in the individual's or organization's operations. Though, not all the externalities are negative.

A positive externality is one in which the third party benefits from other parties' actions. For instance, college students by studying benefit the whole society where they live by increasing the education level in that region.