An externality: a. causes markets to allocate resources inefficiently. b. affects both producers and consumers. c. is a type of market failure. d. weakens the role of the "invisible hand" in the marketplace.

c. is a type of market failure.

An externality is a cost or benefit incurred or received by a third party who has no control over the creation of that cost or benefit. A classic example is pollution from a factory; the factory benefits from producing, and the customers enjoy the products, but the local community may suffer from air or water pollution as an indirect effect.

Externalities are a form of market failure because the market by itself does not account for or resolve these costs and benefits. In the case of negative externalities, such as pollution, the market price of the product doesn't reflect the true costs of its production, leading to overproduction and overconsumption of that good. In the case of positive externalities, such as education (which can yield broader societal benefits), the market can result in underconsumption. Externalities can indeed weaken the role of the "invisible hand" – a term coined by the economist Adam Smith to describe the self-regulating nature of the marketplace – because they represent a discrepancy between the private and the social costs or benefits of a good or a service.