Positive Externalities

A positive externality is a benefit transferred, or a positive "spill-over", to a party that was not a part of the original transaction or decision making process. Here is an example of a positive externality. Suppose homeowners spend $5000 in landscaping improvements to their property in hopes of increasing the market value of their home. These improvements will likely enhance the market value of neighbors' property even though they did not bear any portion of the improvement costs or participate in the decision to improve the yard.

On a larger scale, another example of a positive externality is the benefit associated with the installation of scrubbers in producer's smokestacks. The people that live near the factory benefit from the scrubbers through cleaner air and better health even though they did not bear the cost of installing the scrubbers. Further, these positive benefits will likely "spill-over" to future generations not born yet; each scrubber installed in factories now will decrease the marginal environmental damage that future generations will face.

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