How many parties are typically involved in a transaction that confers an externality?

In a transaction that confers an externality, more than two parties are typically involved because externalities affect individuals or entities that are not directly part of the transaction. For example, in the case of a factory producing pollution, the factory owner and the consumer purchasing its products are the two primary parties in the transaction. However, the pollution created imposes costs on nearby residents, wildlife, and even the broader community, all of whom are affected by the externality but are not part of the initial transaction.

This scenario illustrates how the consequences of an economic activity can ripple outwards, impacting a wider group of stakeholders beyond the immediate buyers and sellers. As a result, recognizing that externalities involve multiple parties allows for a deeper understanding of their implications on welfare, social costs, and the need for potential regulation or intervention to address these effects.