When a cost is transferred to a third party, it is said to have a negative externality. When a benefit is shared with a third party, a positive externality exists.
An externality is a spillover effect, either favorable or unfavorable, that results from an economic transaction between two engaged parties. When external costs or gains from an economic activity flow into the broader public, this is known as an externality. Whether costs or benefits spread outward determines whether an externality is positive or negative.
When a cost is transferred to a third party, it is said to have a negative externality. When a benefit accrues to a third person, there is a positive externality. By taxing products and services that result in spillover costs, the government can discourage negative externality. By providing subsidies for products and services that have positive spillover effects, the government can promote positive externalities.
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