Externalities are economic gains or losses that are by-products of investment and spending decisions.
Externalities can be either positive or negative.
For instance, a house with a fresh new coat of paint may have the external effect of raising the neighbor's property value. Alternatively, letting the property run down to save money may reduce the neighbor s home value. One way to encourage people to invest more in education is to subsidize that investment. In other words, society can help pay for the education so that individuals are encouraged to acquire more of it. In fact, the U.S. and many industrial countries have been subsidizing education heavily for a long time.