An externality is an effect of a market transaction that affects an unrelated third party, either positively or negatively. For example, if a manufacturing facility pollutes a nearby river, it creates a negative externality by creating a health hazard for the people downstream. Conversely, a public park that attracts visitors from all around the area is considered a positive externality for its contribution to the local economy. In both cases, the person or company who initiated the activity does not take into account the third party’s welfare when making decisions, leading to outcomes which can have significant consequences.
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