An externality is said to occur when the actions of one entity bears an impact on other entities. These externalities can be positive as well as negative. A positive externality is when the action of one person positively affects the others. For instance plantation by a person provides fresh air to the neighbours. Also, it contributes to the environment and at the same time, increases the welfare of the neighbours. Thus, plantation by a person affects the life of the people living in the surrounding areas.