Health hazard caused to the person due to smoking is not an example of externalities because the consequences of the activity are not on the third party but on the person himself/herself. An externality is a consequence of an economic activity experienced by unrelated third parties; it can be either positive or negative. Pollution emitted by a factory that spoils the surrounding environment and affects the health of the nearby residents is an example of a negative externality. The effect of a well-educated labour force on the productivity of a company is an example of a positive externality.