Question

An externality arises when a firm or person engages in an activity that affects the well-being of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a _________ externality.

Answer 1

Positive externality

Step-by-step explanation:

There are two types of externalities:

(i) Positive externality

(ii) Negative externality

Positive externality refers to a externality in which the third party who is not involved in the economic transaction between the two persons is benefited. So, there is an indirect positive impact on the consumption bundle of third person who is not a part of this transaction. For example: Restoring the historic buildings. So, the visitors enjoys visiting these places.