Define externalities. Explain positive and negative externalities with examples.

Externalities-when an individual or a firm affects by an activity which is caused by another individual or a firm, it is known as externality.

There are two types of externalities:

I. Positive externality- when an individual gets benefit by an activity which is caused by other. It is known as positive externality.

Example- Use of public parks by the people for which no payments are made by the public. It increases welfare through positive impact on health.

II. Negative externality- when an individual is harmed by an activity which is caused by other. It is known as negative externality.

Example- Environment pollution caused by industrial plants. Such pollution reduces the welfare through negative impact on health.