Final answer:
Externalities are economic side effects or consequences that can be positive, like a neighbor's tree planting, or negative, like pollution from a factory. Market equilibrium is achieved at a price and quantity where supply meets demand. Firms can lead to market failure by creating negative externalities that aren't reflected in their pricing.
Step-by-step explanation:
Positive and negative externalities are examples of market failures, where the costs or benefits of a good or service are not fully accounted for by the buyer and seller.
A positive externality occurs when the consumption or production of a good or service benefits a third party who is not directly involved in the transaction. For example, if a beekeeper sets up beehives in an area filled with farmers, the bees will pollinate the crops and benefit the farmers.
On the other hand, a negative externality occurs when the consumption or production of a good or service imposes costs on a third party. For instance, pollution from a factory can harm the health of nearby residents.