Using a suitable example, distinguish between positive externalities and negative externalities. Using a suitable example, distinguish between stock variables and flow variables.

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Positive externalities are benefits caused by an activity for which no payment is received. For example, construction of a public park increases welfare of people who use it for free. Negative externalities are harms caused by an activity for which no penalty is imposed. For example, industrial pollution reduces welfare of nearby residents.

Stock variables are measured at a point in time and have no time dimension (e.g., wealth, capital). Flow variables are measured over a period of time and have a time dimension (e.g., income, investment). For example, savings is a flow concept (per month/year) while wealth is a stock concept (at a given date).