Which of the following statements about externalities is correct?

The correct statement regarding externalities is that they can lead to market failure in the presence of negative externalities. Externalities refer to costs or benefits that affect third parties who did not choose to incur that cost or benefit. When negative externalities are present, such as pollution from a factory affecting nearby residents, the true costs of production are not reflected in the market price. This discrepancy can result in overproduction of goods that generate negative externalities, leading to market failure, where resources are not allocated efficiently.

In contrast to this concept, the other statements do not hold true. Externalities indeed affect third parties beyond those directly involved in a transaction, suggesting that they do not only involve the parties in the transaction. Additionally, externalities can be negative or positive; not all externalities are beneficial. Lastly, externalities typically influence public policy significantly, as governments often intervene to correct the inefficiencies caused by them, such as implementing regulations or taxes to address negative externalities.