Question

Which of the following statement(s) is correct? (x) An externality is the uncompensated impact of one...

Which of the following statement(s) is correct?

(x) An externality is the uncompensated impact of one person's actions on the well-being of a bystander.

(y) An externality exists whenever markets are not able to reach equilibrium.

(z) In a market economy, government intervention may improve market outcomes in the presence of externalities.

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Answer #1

Option x and z are correct. An externality is the uncompensated impact of one's person's actions on the well -being of a bystander. There are two types of externalities - positive and negative externalities.Positive externalities may provide benefit to bystander and negative externalities may provide costs to bystander. External costs or benefit of their action, so the market outcome is not efficient. In a market economy, government intervention may improve market outcomes in the presence of externalities. During negative externality, government wil impose tax on firms who creates negative externality and provides subsidies to those individuals who creates positive externality. And government intervention may lead to socially efficient outcome.

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