What is a positive externality?

A positive externality refers to a situation where a third party, who did not choose to participate in an activity, benefits from that activity. This aligns perfectly with the concept of a benefit that affects a party who did not choose to incur that benefit.

For instance, consider a scenario where someone plants a beautiful garden in their front yard. The owner incurs the costs and decisions related to planting and maintaining the garden. However, neighbors and passersby enjoy the aesthetic appeal and the potential increase in property values as a result of that garden, even though they did not contribute to its creation or maintenance. This is a classic example of a positive externality at work: the neighbors receive an unintended benefit without having to pay for it.

The idea of a positive externality is fundamental in economics because it highlights how individual actions can lead to broader societal benefits, justifying potential government intervention or community support for certain activities that generate these beneficial effects.