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An externality is an economic term referring to a cost or benefit incurred or received by a third party who has no control over how that cost or benefit was created. Externality: An externality can be both positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole. Externalities are negative when the social costs outweigh the private costs. Pollution emitted by a factory that muddies the surrounding environment and affects the health of nearby residents is a negative externality. Positive externalities occur when there is a positive gain on both the private level and social level. The effect of a well-educated labour force on the productivity of a company is an example of a positive externality. This occurs when the consumption or production of a good causes a benefit to a third party. For example: When someone consumes education, she gets a private benefit. But there are also benefits to the rest of society. In such cases, GDP will underestimate the actual welfare of the economy.

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