Which term describes costs and benefits that affect third parties not involved in a transaction?

The term that describes costs and benefits that affect third parties not involved in a transaction is known as externalities. Externalities are a key concept in economics that illustrate how the actions of individuals or companies can have positive or negative effects on those who are not part of the decision-making process. For example, pollution from a factory affects the health and environment of neighboring communities—these individuals did not partake in the economic transaction between the factory and its customers, yet they bear the consequences.

Understanding externalities is crucial for analyzing market failures, as the presence of unaccounted costs or benefits can lead to inefficient resource allocation. Governments often intervene to correct these market failures through regulations, taxes, or subsidies to promote social welfare.

In contrast, public goods are non-excludable and non-rivalrous, meaning that one person's use does not diminish availability for others, while imperfect information relates to situations where parties in a transaction do not have equal access to information. Private goods are both excludable and rivalrous, where consumption by one person prevents consumption by another.