What are the economic side effects or by-products that affect uninvolved third parties called?

The term for economic side effects or by-products that affect uninvolved third parties is known as externalities. Externalities occur when the actions of individuals or firms have a wider impact on third parties who are not directly involved in the transaction. These effects can be either positive or negative.

For instance, a factory that pollutes a river affects not only its owners and employees but also the community downstream that relies on that water supply. This negative consequence for uninvolved parties is a classic example of a negative externality. Conversely, a positive externality might occur when a homeowner maintains an attractive garden that enhances the neighborhood's appearance and increases property values for neighboring homes.

Understanding externalities is crucial because they can lead to market inefficiencies if not addressed, which is why policies such as taxes, subsidies, or regulations are often implemented to mitigate negative externalities and promote positive ones.