How can positive externalities best be described?

Positive externalities can be best described as benefits conferred to third parties. In economic terms, a positive externality occurs when a decision made by an individual or a firm not only affects them but also has beneficial effects on others who are not directly involved in that decision-making process.

For example, consider a situation where a neighbor decides to plant a beautiful garden. This action not only brings joy to the neighbor but also enhances the aesthetic appeal of the neighborhood, which benefits everyone living nearby, even if they did not contribute to the garden's creation. This spillover benefit is what characterizes positive externalities, as they result in positive impacts on individuals or groups who are outside of the original transaction or activity.

Positive externalities can lead to underproduction of the goods or services that generate these benefits since the private market may not adequately compensate for these external benefits. As a result, understanding and addressing positive externalities is crucial for policymakers who aim to improve overall societal welfare and encourage activities that yield broader benefits.