An externality exists when either the production or consumption of some good has an affect on another's welfare without being taken into account under normal market behavior. Externalities are in effect a type of market failure. When an externality exists, either too much or too little is either produced or consumed than the market price dictates.

 There are Positive and Negative externalities and as a subsection of each there are producer and consumer externalities. Here is an example of each:

A Positive Producer externality would be the classic example of a beekeeper near a farmer. The bees from the beekeeper help polinate the farmer's field. Since the beekeeper is not compensated for his bees' polinating efforts, he uses less bees than is socially optimal.