Explanation:
Externality is a microeconomic concept that aims to explain the positive or negative impact that an economic activity has on third parties. If by exercising an economic activity, a company indirectly benefits society or community, the externality is positive. If economic activity negatively impacts the surrounding community, externality is said to be negative. For example, the pollution that an industry emits in the production process has deleterious effects throughout society, being a negative externality. This is bad for society as a whole.
In the case of positive externality, the main activity of an economic agent brings benefits to society as a whole. For example, teaching in universities has a purpose that is to teach students, but it also has other effects that are widespread in society as a whole, such as reducing the number of cases of violence against women. It is a kind of "side effect" of the economic activity of universities.
Thus, the government acts to stimulate positive externalities, which bring social benefits, and to curb negative externalities, which bring social harm. This is done by stimulating activities that generate positive externalities and by regulating activities that cause negative externalities, such as by fining polluting companies.
