Final answer:
A well-defined externality includes a clear impact on third parties; noise from a firm is a negative externality as it imposes on residents. Positive externalities benefit third parties, like neighborly actions enhancing bird watching. Private costs differ from social costs, which include externalities unaccounted for by firms' supply curves without regulation.
Step-by-step explanation:
An externality occurs when a market exchange impacts a party that is not directly involved in the transaction. In the case of noisy businesses, if the noise negatively affects surrounding residents who are not part of the business exchange, it is considered a negative externality because it imposes external costs on third parties. To be well-defined, an externality must involve a clear impact on third parties, and the case of noise pollution from a firm clearly meets this condition as it affects surrounding residents' quality of life without their consent.
A positive externality, conversely, benefits third parties. For example, your neighbor's bird-friendly garden providing an enhanced bird-watching experience. In terms of private and social costs, private costs are incurred directly by firms or consumers participating in a market transaction, whereas social costs include both private costs and additional costs borne by third parties—such as pollution or noise disturbances.
Without environmental regulations, a firm's supply curve would generally reflect only private costs, neglecting external costs. Command-and-control environmental regulation involves the government imposing specific restrictions, such as emission limits. Issues noted with this approach include rigidity, inefficiency, and lack of innovation incentives.