Market transactions frequently affect people who are NOT part of the transaction. These effects are called "externalities." Externalities occur when market transactions affect people who are EXTERNAL to the transaction.

Externalities can be positive or negative.


EXAMPLES OF POSITIVE EXTERNALITIES

A neighbor who plants beautiful flowers in their yard. (You can enjoy looking at the flowers. You did not pay for their planting and upkeep, however.)

Public Goods


EXAMPLES OF PUBLIC GOODS

Public Highways

Public Education

Public Health Services

Police & Fire Protection

National Defense



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