Which basic principle concerns effects on third parties not involved in a transaction?

• A. Contribution
• B. Externalities
• C. Demand
• D. Utility

Answer: (B)

Externalities are effects on people who aren’t part of the buying or selling decision. These spillover effects can be negative, like pollution from a factory imposing health or clean-up costs on nearby residents, or positive, like the broader social benefits from someone’s education or vaccination that extend beyond the individual. Because the price in a simple market doesn’t account for these external costs or benefits, the market outcome can be inefficient relative to society’s overall welfare.

This isn’t about how much people want a good (demand), the satisfaction people get from consuming it (utility), or a mechanism for sharing costs (contribution). It’s specifically about those unintended effects on third parties outside the transaction, which is why externalities is the correct principle.