Susie lives in a dorm and likes to play loud music in her room. Her neighbor Kara enjoys the same type of music and gets pleasure from Susie turning up the music. Her other neighbor, Alex, can't stand Susie's music and gets mad when she turns it up for all to hear. When Susie plays her music loudly, she creates:

Susie lives in a dorm and likes to play loud music in her room. Her neighbor Kara enjoys the same type of music and gets pleasure from Susie turning up the music. Her other neighbor, Alex, can't stand Susie's music and gets mad when she turns it up for all to hear. When Susie plays her music loudly, she creates a positive externality for Kara and a negative externality for Susie. Externalities are defined as the cost or benefit affecting an individual who is not directly involved in an activity such as the production of a good or the rendering of a service. Externalities can be positive if an individual benefits from the activity. That the effect of the activity on a third party is beneficial such as Kara who benefits/enjoys Susie's music and externalities can also be negative if the activity is detrimental to the individual such as Alex who is uncomfortable with Susie's loud music.