When unintended consequences affect someone who was not part of the initial choice, it is known as an externality.
Externality is when the economic activities of economic agents have an effect on people who are not part of the consumption or production activity. Externality can either be positive or negative.
Positive externality occurs when the benefits to third parties not involved in production is greater than the cost. An example of an activity that generates positive externality is planting trees.
Negative externality occurs when the cost of economic activities to third parties not involved in production or consumption of a good is greater than the benefits. An example of an activity that generates negative externality is smoking.
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