Question

select the correct answer.
which statement defines externality?

a. it is a change in demand brought about by factors other than price.

b. it is the external factors that cause a rise in the supply of goods or services.

c. it is the external factors that cause a decrease in the supply of goods or services.

d. it is the impact of production and consumption on unrelated third parties.

Explanation:

To determine the correct definition of externality, we analyze each option:

• Option A describes a change in demand due to non - price factors, which is a shift in the demand curve, not an externality.
• Option B refers to external factors affecting supply, which is about supply - side influences and not the concept of externality.
• Option C also pertains to external factors affecting supply negatively, and this is not the definition of externality.
• Option D: By definition, an externality is the effect (positive or negative) that the production or consumption of a good or service has on third parties who are not involved in the production or consumption process, i.e., unrelated third parties.

Answer:

D. It is the impact of production and consumption on unrelated third parties.