Externalities are the incidental effects that the activities or actions of one party have on another party. Positive externalities occur when the actions of a person or entity have a positive impact on an unrelated party. Negative externalities occur when a party's actions have an adverse impact on other individuals or entities. Various types of positive and negative externalities exist in any kind of market.
If you operate a manufacturing firm or an energy company then various types of byproducts are created during the production of your firm's goods or energy. You must make arrangements to dispose of this waste, and that may include burning it, dumping it in landfills or flushing it into the ocean. People in the surrounding area will suffer the negative externalities of the pollution that your company creates. However, if you develop a new technology to reduce emissions then you can reduce or eliminate the pollution. You create a positive externality if you share the technology with other firms, with the result that you help to eliminate pollution elsewhere and improve the quality of life of people in the surrounding areas.
When you construct a new building for your business you may create a negative externality in the form of traffic because your clients will clog the surrounding roads. This means that people who live nearby will have to set aside more time to complete road trips and to run errands. However, if you build your new office or factory in a derelict part of town then you help to rejuvenate the area. You create various positive externalities, ranging from increasing property prices to increased revenue for nearby restaurants and gas stations.
If you decide to start accepting online payments for your goods and services then you create various negative externalities. Your clients no longer have to buy paper checks to make payments, which means lost revenue for check-printing firms. Furthermore, banks can lay off employees in charge of processing checks if large numbers of firms start conducting transactions online. However, you also create some positive externalities because your competitors may have to buy software or computer terminals in order to send and receive electronic funds, which means increased revenue for technology firms.
You create negative and positive externalities when you price your goods and services. If you sell a piece of property for a below-market value then other prospective buyers will point to that sale price and use it as a justification for driving down the sale prices of other properties. You therefore cause other property sellers to lose money. However, when property prices drop, property becomes more accessible to people with limited incomes. You therefore create a positive externality by expanding the market.