What is a positive externality?

• A. A positive externality occurs when the consumption of a good benefits others, such as when individuals receive a vaccine and thereby reduce the chance that they will spread disease in their community.
• B. A positive externality happens when a transaction imposes costs on others.
• C. A positive externality is when goods are private and rival in consumption.
• D. A positive externality is when a firm monopolizes a market and raises prices.

Answer: (A)

Positive externalities occur when the action of one person or firm creates a benefit for others that isn’t captured in the market price. Getting a vaccine fits this idea: by reducing the chance you’ll spread disease, you provide a health benefit to others in your community, even if you don’t receive any payment for creating that benefit.

The other descriptions don’t fit this idea. Costs imposed on others describe a negative externality, not a positive one. Private goods that are rival in consumption concern the nature of the good itself, not external effects. A firm monopolizing a market and raising prices describes market power, not external spillovers.