Which of the following describes a situation in which a third party, outside the transaction, suffers from a market transaction? a) An efficient market.
b) a negative externality
c) a public good.
d) a positive externality.

The correct answer is:

a negative externality (b)

Explanation:

Externalities occur in an economy when the production or consumption of a specific good or service impacts a third party that is not directly related to the production or consumption of that good or service. An externality does not affect the entity that causes the externality. Externalities can be both positive or negative. Let us look at an example of each case:

Negative externality: for example, if a private cement company causes pollution in a community river, there will be a public health impact on the citizens of that community if they consume from the water.

Positive externality: If in establishing a company, that requires a large quantity of power supply, the company sets up a large power generation station that supplies power to a whole community

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