Which statement about externalities is correct?

• A. Externalities are costs or benefits borne by the market participants.
• B. Externalities are costs or benefits that are fully borne by private parties involved in the market.
• C. Externalities are costs or benefits not borne by market participants; negative: pollution from mining; positive: vaccination reduces disease spread.
• D. Externalities are the same as public goods; example: national defence.

Answer: (C)

Externalities happen when the effects of a market transaction spill over to people who aren’t directly involved. Because of this, the price in the market doesn’t capture all the costs and benefits, leading to outcomes that aren’t socially optimal. A negative externality, like pollution from mining, imposes costs on others—people in the community may bear health or cleanup costs that the miner doesn’t pay for. A positive externality, such as vaccination reducing disease spread, provides benefits to others beyond the person who gets vaccinated, even though those others didn’t pay for it. So externalities are about impacts on third parties that aren’t reflected in market participants’ costs and benefits, not simply costs or benefits borne by those directly involved. They aren’t the same as public goods, which have different characteristics.