This article is base on the concept "externalities" (third-party impacts), and attempts to recognize both positive and negative externalities generated by economic activities including consumption and production. The methodology of the study was quantitative, and entirely based on secondary data. the study reveals that certain benefits of tourism industry can be recognized as positive externalities. They include the creation of indirect employment opportunities, the value added to GDP from hotel and restaurant sector, cargo services, and domestic trade and infrastructure development in tourists sites. The government expenditure on education generates positive externalities to the entire society. In the Sri Lankan context, this can be seen in terms of the satisfactory level of labour productivity and increased rate of rural sector labour force participation. The study found that there is a "parallel move" of public expenditure on education and the rate of rural sector labour force participation in Sri Lanka.
