Externalities are the additional costs or benefits beyond the private ones imposed mainly on society that arise out of a production or consumption decision.
Negative Externality: This occurs when a product or decision costs the society more that its private cost. It is generally viewed as a failure of the market because the level of consumption or production of the product is higher than what the society requires. Car pollution is an example; as a driver of a car, you don't account for the costs of the air pollution created by the car, but society is paying for the costs of air pollution.
Positive externalities occur when the benefits to society from consumption of a product exceed the private benefits to the individual consumer. The private benefits to a town of having a large business set up in the local area would include the bushiness gaining extra profits but it would be the (local) society that gains from the external benefits of the new business in terms of employment opportunities and the extra income generated.
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