Editing Externality (section)

==Definitions==

[[File:Garden and house at Lytes Cary Manor - geograph.org.uk - 1137431.jpg|thumb|right|200px|The neighbors who live beside this house and garden get to enjoy the view of the beautiful flowers at no cost.]]
A negative externality is any difference between the private cost of an action or decision to an economic agent and the social cost. In simple terms, a negative externality is anything that causes an [[indirect cost]] to individuals. An example is the toxic gases that are released from industries or mines, these gases cause harm to individuals within the surrounding area and have to bear a cost (indirect cost) to get rid of that harm.  Conversely, a positive externality is any difference between the private benefit of an action or decision to an economic agent and the social benefit. A positive externality is anything that causes an indirect benefit to individuals and for which the producer of that positive externality is not compensated. For example, planting trees makes individuals' property look nicer and it also cleans the surrounding areas.

In microeconomic theory, externalities are factored into competitive equilibrium analysis as the social effect, as opposed to the private market which only factors direct economic effects. The social effect of economic activity is the sum of the indirect (the externalities) and direct factors. The Pareto optimum, therefore, is at the levels in which the social marginal benefit equals the social marginal cost. {{citation needed|date=November 2021}}

Externalities are the residual effects of economic activity on persons not directly participating in the transaction. The consequences of producer or consumer behaviors that result in external costs or advantages imposed on others are not taken into account by market pricing and can have both positive and negative effects. To further elaborate on this, when expenses associated with the production or use of an item or service are incurred by others but are not accounted for in the market price, this is known as a negative externality. The health and well-being of local populations may be negatively impacted by environmental deterioration resulting from the extraction of natural resources. Comparably, the tranquility of surrounding inhabitants might be disturbed by noise pollution from industry or transit, which lowers their quality of life. On the other hand, positive externalities occur when the activities of producers or consumers benefit other parties in ways that are not accounted for in market exchanges. A prime example of a positive externality is education, as those who invest in it gain knowledge and production for society as a whole in addition to personal profit.<ref name="Microeconomics">"Microeconomics" by Robert S. Pindyck and Daniel L. Rubinfeld</ref>

Government involvement is frequently necessary to address externalities. This can be done by enacting laws, Pigovian taxes, or other measures that encourage positive externalities or internalize external costs. Through the integration of externalities into economic research and policy formulation, society may endeavor to get results that optimize aggregate well-being and foster sustainable growth.<ref name="Microeconomics"/>