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Positive Externality

Definition

A positive externality is an external benefit received by third parties due to the production or consumption of a good or service.

Analogy

Imagine you live in a neighborhood where many people have beautiful gardens. The well-maintained gardens increase the aesthetic appeal of the entire neighborhood, providing a positive externality for all residents.

Related terms

External Benefit: An external benefit refers to the benefits received by third parties due to economic activities, such as education spillovers or vaccinations that prevent disease transmission.

Marginal Social Benefit (MSB): MSB represents both private benefits and external benefits associated with producing one additional unit of output. It includes all benefits enjoyed by society.

Coase Theorem: The Coase theorem states that if property rights are clearly defined and transaction costs are low, private bargaining can lead to an efficient resolution of externalities without government intervention.