Types of Externalities:

Examples of externalities include:

• Pollution  by  a firm  in  the course of its production which  causes nuisance or harm  to others. This  is an  example  of a negative externality, external cost, or external diseconomy.
• The harvesting by one fishing company  in the open sea depletes the stock of available fish for the other companies. Over-fishing may result. This is an example of a common property resource, sometimes referred  to as the Tragedy of  the commons.
• An individual planting  an  attractive garden  in  front  of  her  house may benefit others living  in  the  area.  This  is  an example  of  a positive externality, beneficial externality, external benefit or external economy.
• An individual buying a picture-phone for  the  first  time will increase the usefulness of such phones to people who might want to call her. This may lead  to the general acceptance  of  these phones. This  is an  example  of a network externality.

In contrast; a property tycoon buying up a large number of houses  in a town, causing prices to rise and therefore making other people who want to buy  the houses worse off (perhaps by excluding them from the housing market),  is not causing an externality, because  the effect is through prices, and  is considered part  of the normal functioning of the market. Alternatively,  these effects are sometimes called  "pecuniary  externalities", with externalities  as  defined above called "technological externalities."

Externalities  are  important  in  economics because they may lead  to inefficiency. Because  the producers of externalities  do not have  an  incentive to take  into account the effect of their actions on others, the outcome will be inefficient. There will be  too much activity that causes negative externalities such as pollution, and not enough activity that  creates positive externalities, relative to an optimal outcome.