When individuals create, consume, or invest, it can have a ripple effect on other people even when they aren’t directly involved in those transactions. When said actions have a major effect on third parties, economists refer to those effects as externalities. There can be positive or negative externalities. Understanding Externalities Both the production and consumption of goods can lead to externalities that have a negative or positive consequence. Additionally, externalities can affect a single individual and organization, or impact broader society despite not being directly related to the production or consumption of the goods or services. There are two main types of externalities-positive and negative. Both can also fall into the consumption and production bucket. Consumption externalities happen when a consumer uses a good, product, or service and it has a positive or negative impact on third parties. Production externalities are when companies or an industrial operation produce things that have a negative or positive impact on third parties. Positive Externalities Not all externalities have detrimental effects on third parties. Positive externalities can have positive effects no private enterprises and society at large. For example,