Externalities: Positive Externalities

Positive externalities are the mirror image of negative externalities. A positive externality exists when the production or consumption of a good or service generates benefits for third parties who are not directly involved in the transaction and who do not pay for those benefits. Positive externalities lead to under-production or under-consumption relative to the socially optimal level, because the market price does not fully reflect the total benefits to society.

Key Definition: A positive externality is a spillover benefit received by third parties as a result of production or consumption, for which no payment is made. It causes the social benefit to exceed the private benefit.

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Private Benefits, External Benefits, and Social Benefits