What defines a positive externality?

A positive externality occurs when an activity has beneficial effects on individuals or entities that are not directly involved in the transaction. This means that the actions of producers or consumers create additional positive impacts for third parties, leading to societal benefits beyond the immediate market participants. For example, when a person decides to plant a garden, they not only enjoy the fruits of their labor, but neighbors and passersby also benefit from the beautification of the area and potentially an increase in property values.

In this context, the definition aligns perfectly with the concept of positive externalities, which are often associated with goods like education, vaccination, and public parks, where the benefits extend to the wider community rather than just those who directly purchase or utilize the good or service.