Externalities are the indirect consequences (positive or negative) of an economic action that impact uninvolved parties. These effects are not included in market prices.
| Positive Externalities | Negative Externalities |
|---|---|
| Advantages experienced by others due to an individual's or firm's actions. | Disadvantages or costs imposed on others because of an individual's or firm's actions. |
| These enhance societal well-being and are under-supplied by the market. | These diminish societal well-being and are over-produced by the market. |
| Example: An organic vegetable farmer improves air and soil quality for nearby residents. | Example: A factory polluting a river harms fishermen and nearby villagers. |
| Government may support these activities through subsidies or incentives. | Government may restrict these activities through taxes or regulations. |