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Homework answers / question archive / Why do externalities arise? a
Why do externalities arise?
a. The costs of production are not borne by the producer.
b. The consumption of a public good is non-excludable.
c. Goods of mass consumption are not produced as they do not yield profit for the producers.
d. An economic activity imposes a burden on those who are not directly involved in it.
e. The government produces goods and services which are consumed by only a particular group of people.
The answer to this question is:
d. An economic activity imposes a burden on those who are not directly involved in it.
An externality happens when a firm or a person takes part in an activity that impacts the welfare of a third-party but does not receive compensation or pays for that impact. If the effect to the third-party is undesirable, it is known as a negative externality. On the other hand, if the impact is beneficial, it is referred to as positive externality.
