If you see the phrase positive externality and think to yourself, "Oh, that's good!"—then I hope I can help you see things differently. Externalities, both pos

If you see the phrase positive externality and think to yourself, "Oh, that's good!"—then I hope I can help you see things differently. Externalities, both positive and negative, mean that somebody other than the owner of an economic resource is affected by its use. A negative externality means that somebody else bears part of the resource's cost, and a positive externality means that somebody else reaps part of its reward. In this sense, positive externalities (just like negative externalities) are a failure of property rights with perverse consequences; part of the return to the investor's investment is placed in the public domain, as economists say. So positive externalities lead to underinvestment, as rayiner noted, because the externalized benefit is captured by someone other than the investor. And indeed there is an emerging narrative that claims a combination of corruption and over-regulation contributed to the demise of America's early streetcar systems by eroding the property rights of streetcar operators to the point that they could not profitably run their lines. That is, regulation externalized the benefits of streetcars to such an extent that their owners went bankrupt and streetcars disappeared. A recent article from Vox makes the case [0]. It goes like this: (1) streetcar operators sought monopolies from cities, accepting regulation in return; then (2) regulators fixed fares at a nickel and required streetcar operators to pave and maintain the roads along their lines (because streetcars were originally drawn by shod horses and mules), but (3) when the value of a nickel fell, politicians would not allow fares to rise, even while the paved roads provided by streetcar operators subsidized the automobiles that began to compete with them [1]. History and economics are complicated, but it's clear that private property rights in public transit have just about disappeared in America over the past century or so. And so private, market-directed investment has disappeared too. As a result, today almost every dollar that goes into our core transportation infrastructure comes directly out of taxpayers' pockets and passes through a political process that allocates investments in a way that gives scant attention to their marginal benefit. So in cities like mine, we have rather more billion-dollar suburban highway interchanges than we should have, and rather too little public transit infrastructure. 0. http://www.vox.com/2015/5/7/8562007/streetcar-history-demise http://www.vox.com/2015/5/7/8562007/streetcar-history-demise 1. A blog post from Market Urbanism offers more details (together with an excoriation of left-liberal politics): http://marketurbanism.com/2010/09/23/the-great-american-streetcar-myth/ http://marketurbanism.com/2010/09/23/the-great-american-stre...