Which of the following defines externalities?

the gradual increase of prices and wages

the effect of an economic transaction on someone outside of the transaction

the housing shortage following a population boom

the gradual depletion of a nation's natural resources

Among the options given on the question the correct answer is option B.

the effect of an economic transaction on someone outside of the transaction

Explanation: The externality is an economic term which means a cost or benefit received by the third party who are not involved in the activity. The externality can be both positive and negative. It can stem both from production and consumption. Moreover, the affect can be private meaning that an individual or organization, else public.

The given option which says that the effect of an economic transaction on someone outside of the transaction defines the externality. Because the person who has the effect of the transaction is not involved in the transaction.

Therefore, the option C is the correct answer.