Describe the concept of externalities.

Describe the concept of externalities.

Externalities refer to the spillover effects of economic activities on third parties who are not directly involved in the transaction. These effects can be positive or negative and can occur in the production or consumption process. Positive externalities occur when the actions of one party benefit others, such as the creation of public parks or education. Negative externalities occur when the actions of one party impose costs on others, such as pollution or noise from industrial activities. Externalities can lead to market failures as the prices and quantities determined by the market do not fully account for the costs or benefits imposed on third parties.