Updated Jun 26, 2020Definition
The positive effects on unrelated third parties that originate during the consumption of a good or service.Example
A possible example could be your neighbor’s flower garden. She most likely cultivates the plants solely for her own pleasure, yet everybody can enjoy the beauty of the flowers whenever they walk by. Relevance
Without any regulatory influence, positive externalities will not be taken into account by the causers. This results in a market failure and an undersupply of beneficial behavior, because the suppliers produce less than in an efficient market. Hence, regulations are needed to provide incentives and internalize the externalities.
Glossary