seller?

As an example, consider a concert producer who wants to build an outdoor arena that will host country music

concerts a half-mile from your neighborhood. You will be able to hear these outdoor concerts while sitting on

your back porch—or perhaps even in your dining room. In this case, the sellers and buyers of concert tickets

may both be quite satisfied with their voluntary exchange, but you have no voice in their market transaction.

The effect of a market exchange on a third party who is outside or “external” to the exchange is called an

externality. Because externalities that occur in market transactions affect other parties beyond those

involved, they are sometimes called spillovers.

Externalities can be negative or positive. If you hate country music, then having it waft into your house every

night would be a negative externality. If you love country music, then what amounts to a series of free

concerts would be a positive externality.
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