What is characterized as a positive externality?

A positive externality occurs when an activity or decision results in beneficial effects for parties who are not directly involved in that activity. This concept is rooted in economic theory, which suggests that certain actions can produce spillover effects that enhance the welfare of others, often in ways that are not reflected in market transactions.

For example, if a company invests in a research and development project that leads to an innovative technology, the benefits of that technology may extend to the wider community. Individuals and businesses that did not contribute to the research can still enjoy the advantages, such as improved products or efficiencies, which illustrates the essence of a positive externality.

In this context, the other options highlight scenarios that either do not constitute externalities or represent negative consequences. Thus, the characterization of a positive externality as a positive impact on parties not engaged in the activity captures the core essence of how these external benefits play a pivotal role in economic interactions.