Externalities arise when the actions of one person affect others from "summary" of Public Finance by Harvey S. Rosen
Externalities occur when the actions of one economic agent affect the well-being of another economic agent in a way that is not transmitted through prices. This can lead to market outcomes that are not efficient from society's perspective, as individuals do not take into account the full social costs or benefits of their actions. Negative externalities arise when one person's actions impose costs on others without compensation. For example, when a factory emits pollution that harms the health of nearby residents, these costs are not reflected in the price of the goods produced by the factory. As a result, the factory may produce too much of the good, leading to an inefficiently high level of pollution. On the other hand, positive externalities occur when one person's actions confer benefits on ...
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