page_title: Externality
section_title: Positive
hierarchical_section_title: Externality / Examples / Positive
caption_attribution_description: English: positive consumer externality
context_page_description: In economics, an externality is the cost or benefit that affects a third party who did not choose to incur that cost or benefit. Externalities often occur when the production or consumption of a product or service's private price equilibrium cannot reflect the true costs or benefits of that product or service for society as a whole. This causes the externality competitive equilibrium to not be a Pareto optimality.
  Externalities can be either positive or negative. Governments and institutions often take actions to internalize externalities, thus market-priced transactions can incorporate all the benefits and costs associated with transactions between economic agents. The most common way this is done is by imposing taxes on the producers of this externality. This is usually done similar to a quote where there is no tax imposed and then once the externality reaches a certain point there is a very high tax imposed. However, since regulators do not always have all the information on the externality it can be difficult to impose the right tax. Once the externality is internalized through imposing a tax the competitive equilibrium is now Pareto optimal.
context_section_description: A positive externality (also called "external benefit" or "external economy" or "beneficial externality") is the positive effect an activity imposes on an unrelated third party. Similar to a negative externality, it can arise either on the production side, or on the consumption side.
   
  A positive production externality occurs when a firm's production increases the well-being of others but the firm is uncompensated by those others, while a positive consumption externality occurs when an individual's consumption benefits other but the individual is uncompensated by those others.
  Examples of positive production externalities LTM
  A beekeeper who keeps the bees for their honey. A side effect or externality associated with such activity is the pollination of surrounding crops by the bees. The value generated by the pollination may be more important than the value of the harvested honey.
  The corporate development of some free software (studied notably by Jean Tirole and Steven Weber )
  An industrial company providing first aid classes for employees to increase on the job safety. This may also save lives outside the factory.
  Restored historic buildings. Visitors enjoy visiting historic buildings. Preserving historic buildings provides an anchor to the past, as well as an incentive to the future.
  A foreign firm that demonstrates up-to-date technologies to local firms and improves their productivity.
  Examples of positive consumption externalities include:
  An individual who maintains an attractive house may confer benefits to neighbors in the form of increased market values for their properties.
  An individual receiving a vaccination for a communicable disease not only decreases the likelihood of the individual's own infection, but also decreases the likelihood of others becoming infected through contact with the individual. (See herd immunity)
  Increased education of individuals, as this can lead to broader society benefits in the form of greater economic productivity, a lower unemployment rate, greater household mobility and higher rates of political participation.
  An individual buying a product that is interconnected in a network (e.g., a smartphone). This will increase the usefulness of such phones to other people who have a video cellphone. When each new user of a product increases the value of the same product owned by others, the phenomenon is called a network externality or a network effect.  Network externalities often have "tipping points" where, suddenly, the product reaches general acceptance and near-universal usage.
  In an area that does not have a public fire department, homeowners who purchase private fire protection services provide a positive externality to neighboring properties, which are less at risk of the protected neighbor's fire spreading to their (unprotected) house.
  The existence or management of externalities may give rise to political or legal conflicts.
  Collective solutions or public policies are implemented to regulate activities with positive or negative externalities.
caption: Positive Consumption Externality
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