Which of the following is a positive externality in industry?

• A. Pollution from production
• B. Knowledge spillovers from proximity to other firms or R&D
• C. Increased tax revenue
• D. Higher energy consumption

Answer: (B)

Positive externalities arise when a firm’s actions create benefits for others who don’t pay for them. Knowledge spillovers from proximity to other firms or R&D fit this idea perfectly: when companies are near each other or near research hubs, ideas, techniques, and innovations diffuse through networks. This learning helps nearby firms improve, innovate, or cut costs without a direct payment, generating benefits beyond the original producer.

Pollution from production, by contrast, imposes costs or harms on people and the environment, which is a negative externality. Increased tax revenue is not an externality at all—it's a government outcome from taxation, not a spillover from industrial activity. Higher energy consumption isn’t a beneficial spillover to others and doesn’t describe a positive externality in itself.