An externality is the uncompensated impact of one person's actions on:

• A. the well-being of a bystander
• B. the producer's profit
• C. the firm's production costs
• D. the government's tax revenue

Answer: (A)

Verified step by step guidance

1. Understand the concept of an externality: it occurs when a person's actions affect the well-being of others without compensation or payment.
2. Identify the parties involved: the person whose actions cause the effect, and the bystander who experiences the impact.
3. Recognize that externalities can be positive or negative, but in both cases, the key feature is that the affected party is not part of the original transaction.
4. Eliminate options that relate to internal effects within the firm or government, such as producer's profit, firm's production costs, or government's tax revenue, since these are not external impacts on others.
5. Conclude that the correct understanding of an externality is the uncompensated impact on the well-being of a bystander.