Registered Environmental Manager (REM) Practice Exam

What is the definition of an externality?

1. The initial cost of producing a good or service

2. A financial benefit received by consumers only

3. The cost or benefit experienced by individuals other than the producer or consumer

4. A regulation imposed to protect consumer rights

The correct answer is: The cost or benefit experienced by individuals other than the producer or consumer

An externality is best defined as the cost or benefit experienced by individuals other than the producer or consumer involved in a transaction. This concept is crucial in environmental management because externalities represent the impacts of economic activities on third parties—these can be positive or negative. For instance, when a manufacturing plant pollutes a river, the surrounding community may suffer health issues and loss of enjoyment, which represent negative externalities. Conversely, a company investing in green space may provide benefits to nearby residents that are not accounted for in the company's profit and loss statements, illustrating positive externalities. Understanding externalities is vital in the field of environmental management as it helps to highlight the broader social implications of economic activities and the importance of regulation and policy to mitigate negative impacts or enhance positive benefits.