The Third-Party Problem

question 157

Multiple Choice

The third-party problem

• A) occurs when a market activity leads to a negative externality.
• B) occurs when a market activity leads to a positive externality.
• C) occurs when a market activity leads to a negative or a positive externality.
• D) is the same as the free-rider problem.
• E) is associated with the production of private goods but not public goods.

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Definitions:

Beta

A measure of a stock's volatility in relation to the overall market; a beta above 1 indicates higher than market volatility.

Market Risk Premium

The extra return over the risk-free rate that investors require to compensate them for the risk of investing in the stock market.

Risk-free Rate

The return on an investment with no risk of financial loss, often associated with government bonds.

Required Return

The minimum expected yield by investors for providing capital to a company or project.