Externalities
Market prices usually reflect the costs producers pay to produce goods and the benefits consumers receive from the good. A kind of market failure occurs when market prices fail to reflect all the costs and all the benefits involved. This kind of market failure is called an externality problem.
Externalities exist when some of the costs or benefits associated with the production or consumption of a product spill over to third parties, who do not produce or pay to consume the product.
Positive externalities are benefits enjoyed by someone who does not produce or pay to consume a product. In other words, you get the benefit without having to pay the cost. An example of a positive externality is free elementary education, because society as a whole benefits when others can read and write. The government provides free public education to encourage everyone to be educated. Positive externalities often call for government subsidies or government provision.
Other examples of positive externalities:
Negative externalities are costs paid by someone who does not produce or pay to consume a product. In other words, you pay the cost without getting the benefit. An example of a negative externality is second-hand smoke: because others suffer from the smoke, the government may pass laws preventing smoking in certain places. Negative externalities often call for the government to clearly define property rights, or for corrective government measures such as taxation or fines.
Other examples of negative externalities: