Which of the following is true about third parties in the context of the four types of goods and their characteristics?

• A. Third parties can experience external benefits or costs when consumption or production of a good creates externalities.
• B. Third parties are only relevant in the case of club goods.
• C. Third parties always have direct control over the allocation of private goods.
• D. Third parties are affected by externalities when goods are non-excludable and non-rivalrous.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of third parties in microeconomics. Third parties are individuals or groups who are not directly involved in the consumption or production of a good but can be affected by it.
2. Step 2: Recall the four types of goods based on excludability and rivalry: private goods (excludable and rivalrous), public goods (non-excludable and non-rivalrous), common resources (non-excludable and rivalrous), and club goods (excludable and non-rivalrous).
3. Step 3: Recognize that externalities occur when the consumption or production of a good affects third parties either positively (external benefits) or negatively (external costs). Externalities are not limited to any one type of good but can arise in various contexts.
4. Step 4: Analyze each statement: Third parties can experience external benefits or costs when externalities exist, which is a general principle and not restricted to club goods or private goods. Third parties do not always have direct control over private goods allocation, and externalities can affect third parties regardless of the good's excludability or rivalry.
5. Step 5: Conclude that the correct understanding is that third parties are affected by externalities through external benefits or costs, which aligns with the first statement.