What is a negative externality?

A negative externality refers to a cost that is imposed on individuals or groups who did not choose to incur that cost. This concept is particularly important in economics as it highlights how the actions of one party can have unintended adverse effects on others. For instance, a factory that emits pollution may lower air quality for nearby residents who are not involved in the production process and did not consent to the pollution. As a result, these residents experience health issues, decreased property values, and other negative outcomes stemming from the factory's operations, despite not being direct participants in those activities.

This concept emphasizes the importance of considering broader societal impacts when evaluating the costs and benefits of economic activities. When negative externalities occur, it typically indicates a market failure, where the price of goods does not reflect the true social cost, leading to overproduction of the goods that generate these externalities. This situation often calls for government intervention or policy measures to mitigate the effects and promote a more efficient allocation of resources.