An externality, which is sometimes also called a spillover, can have a negative or a positive impact on the third party. If those parties imposing a negative externality on others had to account for the broader social cost of their behavior, they would have an incentive to reduce the production of whatever is causing the negative…

In the case of a positive externality, the third party obtains benefits from the exchange between a buyer and a seller, but they are not paying for these benefits. If the parties generating benefits to others would somehow receive compensation for these external benefits, they would have an incentive to increase production of whatever is causing the positive externality.

externality — a market exchange that affects a third party who is outside or “external” to the exchange; sometimes called a “spillover”. positive externality — a situation where a third party, outside the transaction, benefits from a market transaction by others. negative externality — a situation where a third party, outside the transaction, suffers from a market transaction by others. market failure — When the market on its own does not allocate resources efficiently in a way that balances social costs and benefits; externalities are one example of a market failure.