The costs of a market activity imposed on an individual NOT engaged in the market activity are ________ costs.
Question
The costs of a market activity imposed on an individual NOT engaged in the market activity are ________ costs.
Solution
The costs of a market activity imposed on an individual NOT engaged in the market activity are referred to as "external" costs.
Here's a step-by-step explanation:
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In economics, costs are divided into two categories: internal costs and external costs.
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Internal costs are the costs that are directly incurred by the producer or consumer participating in the market activity. These include production costs for the producer (like raw materials, labor, and overhead) and purchase price for the consumer.
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External costs, on the other hand, are the costs that are not borne by the parties directly involved in the market activity. Instead, they are imposed on third parties who are not engaged in the market activity.
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These costs are called "external" because they are outside the control of the individuals or entities involved in the market transaction. They are also often not reflected in the price of the goods or services being traded.
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Examples of external costs include pollution, traffic congestion, and noise pollution caused by a factory. These costs are borne by the surrounding community, not by the factory owner (who is engaged in the market activity) or the consumers of the factory's products.
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