This is another of my favorite topics!
There are two types of externalities, which can also be thought of as "external" costs and benefits:
1. Negative (i.e., detrimental) externalities ... spillover costs
2. Positive (i.e., beneficial) externalities ... spillover benefits
In a free market system, there tends to be too much of #1 (negative externalities) and too little of #2 (positive externalities) produced. This type of "market failure" leads to a good argument for government intervention --- intending that the government will provide more goods that have positive externality characteristics and to enforce laws, pay for cleanup, etc. for firms that cause negative externalities in society.
When most people think of negative externalities, they think of the classic example --- pollution. And while pollution (both air and water) illustrates spillover costs very well --- an activity caused by a firm that causes uncompensated costs on others, and for which the firm has little to no incentive to pay for the cleanup process, as well as to compensate society for the damage created.
Other, less-dramatic examples of negative externalities would include "noisy neighbors", "barking dogs", "littering", etc.
Can you think of three examples of goods with positive externality characteristics?
More to follow ... graphs, inequalities, etc.
