Externalities

Externality is an economic term that everyone should know.  The Glossary of Research Economics defines it as "An effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account."  That may be a bit hard to digest, so I'll give some examples.  Externalities can be both positive and negative, meaning the effects on the party who was not involved in the choice can be good or bad.

Imagine a homeowner spends $1000 and twenty hours of his time planting a garden in front of his house.  He is not planning to sell his house any time soon; he just loves gardens.  If he did sell, though, this improvement could increase his asking price and/or sell his house faster, because when potential buyers first visit the house they will likely have a more positive outlook when they see the nice garden.  Now imagine his next door neighbor is trying to sell her house a month after he plants the garden.  Potential buyers of her house will see his garden and could have similar feelings.  She would benefit from his economic decisions, and it is highly unlikely that she will write him a check for a few hundred dollars when her house sells.  This is a positive externality: his decision to plant a garden (a decision she was not involved in) benefits her and she does not reimburse him for the benefit.

For a negative externality, imagine the same two neighbors.  Now, though, instead of planting a garden, he has a broken down Pontiac sitting on his front lawn that he works on perpetually.

Negative externalities get much more attention from economists and policymakers than positive externalities, understandably so.  They are especially important in environmental policy.  I think about them during social welfare debates, too.