Which term best describes the situation when one country increases its army because others did, resulting in additional costs or benefits not reflected in market transactions?

• A. Public good
• B. Externality
• C. Price discrimination
• D. Market equilibrium

Answer: (B)

Verified step by step guidance

1. Understand the concept of an externality: It occurs when a decision causes costs or benefits to third parties that are not reflected in market prices or transactions.
2. Analyze the scenario: One country increases its army because others did, which leads to additional costs (such as increased military spending) that affect others but are not accounted for in market exchanges.
3. Compare with other options: A public good is non-excludable and non-rivalrous, price discrimination involves charging different prices to different consumers, and market equilibrium is where supply equals demand.
4. Recognize that the situation describes a cost imposed on others without compensation, fitting the definition of an externality.
5. Conclude that the best term describing this situation is 'Externality' because it captures the unintended side effects on others not reflected in market prices.