What is an externality, in economics?

An externality is usually the uncompensated benefits and costs accrued on an economic activity that affects the third party indirectly. Additionally, an externality is created by inadequately defined property rights. An externality can either be positive or negative. A positive externality takes place when consumption and production cause a benefit to an unrelated third party, for example, when a company conducts research and development to improve their services, they end up adding general knowledge to the society. A negative externality is a cost incurred due to a harmful consequence of economic activity to an unrelated third party. For example, if the company is using fossil fuels to produce its goods it will affect the people living around the company. Possible solutions to prevent externality include taxes. Taxes will discourage the economic activities that cause uncompensated costs to the unrelated third party.