The production and consumption of some products may give rise to same harmful or beneficial side effects that are borne by firms or people not directly involved in the production or consumption of the product. These are called externalities. There are external diseconomies and economies of production and consumption. External diseconomies
Of production are uncompensated costs imposed on some firms by the expansion of output by other firms. For example, the increased discharge of waste materials by some firms along a waterway result in antipollution legislation that increases the cost of disposing of waste materials for all firms in the area. External economies of production are uncompensated benefits conferred on some firms by the expansion of output by other firms. An example of this arises when some firms train workers and some of there workers go to work for other firms (which, therefore, save on training costs). External diseconomies of consumption are uncompensated costs imposed on some individuals by the consumption
Expenditures of other individuals. For example , smoking in a public place has a harmful effect (i.e., imposes a cost ) on nonsmokers in the place. Finally, external economies of consumption are uncompensated benefits conferred on some individuals by the increased consumption of a product by other individuals. For example, increased expenditures to maintain a lawn by a homeowner increases the value of neighbor’s home also.