An externality is a consequence of an entity’s actions on somebody who did not agree to it. If I play loud music and wake up the baby next door, the externality of my enjoyment is the suffering endured by me neighbours who now have to tend to their baby.

This example is a negative externality. Another would be the pollution created by a company. The manufacture of the product from which a company will profit might generate pollution, the costs of which it does not suffer, but the surrounding population does.

An example of a positive externality would be Einstein’s theory of general relativity that allowed software developers to create useful GPS devices. Productive nations owe their flourishing to such externalities. As Issac Newton said, “If I have seen further, it is by standing on the shoulders of Giants.”

Positional externalities are slightly less intuitive. They are second-order effects on the perception of value due to adjustments in the context. Luxury good manufacturers take advantage of this effect by pricing their items at many times that of a comparable product. A Versace jacket will cost £1000 while a nearly identical jacket costs £50. The scarcity and premium price of the Versace product will change its perceived value.