Question

(i) Define externalities.

Hint:

Externalities are the unintended effects of economic activities on third parties. Positive externalities create benefits, while negative externalities impose costs, influencing government policies like taxes and subsidies.

Answer 1

Externalities refer to the unintended side effects of economic activities on third parties that are not directly involved in the production or consumption of goods or services. These can be either: 
Positive Externalities: Benefits to third parties (e.g., planting trees improving air quality). 
Negative Externalities: Costs to third parties (e.g., pollution affecting nearby residents).