What best defines a positive externality?

• A. Benefit enjoyed by third parties not paid for by the producer; example: vaccination reduces illness in the community.
• B. Cost imposed on third parties not reflected in market price.
• C. Cost borne by the producer that is reflected in price.
• D. Non-excludable public good.

Answer: (A)

Positive externalities occur when the action of a market participant provides a benefit to people who are not involved in the transaction, and those benefits are not paid for through the market price. Vaccination is a classic example: getting vaccinated protects the individual and also reduces illness in the community, benefiting others who didn’t pay for or decide to get the vaccine. Because the social benefit is larger than the private benefit, the market on its own tends to underprovide the activity, which is why policies sometimes support it. The other descriptions refer to costs imposed on others (negative externality), costs borne by the producer that are reflected in price (private cost), or a non-excludable public good (a separate concept with its own issues).