An externality is: a

An externality is b. a third-party benefit or cost that is associated with the production of a good.

An externality happens when a business or an individual engages in an action that influences the welfare of a third-party who isn't compensated or reimbursed for the effect caused. If the effect on the third-party is advantageous, it is known as a 'positive externality'. Conversely, if the impact is detrimental to the welfare of the third-party, it is known as a 'negative externality'. For instance, a business constructing a road to make it easier for its own vehicles to reach the market results in positive externality because the members of the public will use the road. On the other hand, a firm that is involved in the production of electricity generates carbon emissions that pollute the environment and endanger the health of the public. This is an example of a negative externality.