How is an externality defined in economics?

An externality in economics is defined as a side effect of an economic activity that impacts third parties who did not choose to be involved in that activity. This means that externalities occur when the actions of individuals or businesses have consequences—positive or negative—for others who are not directly part of the transaction. For instance, pollution generated by a factory can negatively affect the health and environment of nearby residents, who have no say in the factory's operations. Conversely, a positive externality could be the benefits an individual receives from a well-maintained public park, which enhances community well-being even for those who do not directly contribute to its funding or upkeep. Understanding externalities is crucial because they often lead to market failures, necessitating potential government intervention to correct the inefficiencies and ensure a more equitable distribution of costs and benefits within society.