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___________.

Answer 1

Answer:

The answer is a positive externality

Explanation:

Positive externality is when the activities of a company or person through consumption or production is beneficial to a third party that was not involved in the consumption or production.

Example of positive externality is a beekeeper that breeds bees for their honey which is enjoyed by third party.

Negative externality is when the activities of a company or person through consumption or production is harmful to a third party that was not involved in the consumption or production.

Example is when the activity of a firm results in pollution. Pollution affects the community in which the firm is.