Costs imposed on third parties not reflected in market prices are known as which concept?

Costs imposed on third parties not reflected in market prices are known as which concept?

• A. Positive Externalities
• B. Negative Externalities
• C. Internalities
• D. Externalities

Answer: (B)

Negative externalities occur when the production or consumption of a good creates costs that affect people who are not part of the market transaction, and these costs are not reflected in the market price. Because the price ignores these external costs, the good may be overproduced or overconsumed relative to the social optimum. For example, a factory that pollutes a river imposes cleanup costs and health risks on nearby residents who do not pay for them. This differs from positive externalities, where third parties gain benefits not paid for; internalities, which are costs one imposes on themselves; and externalities as a general term that covers both positive and negative cases. Since the focus is on costs imposed on others not reflected in prices, the best match is negative externalities.

Negative externalities occur when the production or consumption of a good creates costs that affect people who are not part of the market transaction, and these costs are not reflected in the market price. Because the price ignores these external costs, the good may be overproduced or overconsumed relative to the social optimum. For example, a factory that pollutes a river imposes cleanup costs and health risks on nearby residents who do not pay for them. This differs from positive externalities, where third parties gain benefits not paid for; internalities, which are costs one imposes on themselves; and externalities as a general term that covers both positive and negative cases. Since the focus is on costs imposed on others not reflected in prices, the best match is negative externalities.