Sam lives next to The Party Pub and its outdoor "beer garden" that features live music. An economics major, Sam considers this a positive externality. Dave, another economics student, lives next to The Party Pub too, but he considers the music a negative externality. Which student, if either, is correct? Why?

Both students are correct if they are accurately stating their preferences. Sam must enjoy live music. He can sit in his yard and enjoy these benefits without having to pay a cover charge. Dave, on the other hand, thinks the music a nuisance. It imposes a cost on him since he obviously values a quieter environment.