An externality arises when a person engages in an activity that influences the well being of a bystander and yet neither pays nor receives any compensation for that effect H arc Inc items and derived items copyright o 2001 by Harcourt, IncHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. An externality arises... . . . when a person engages in an activity that influences the well- being of a bystander and yet neither pays nor receives any compensation for that effect