What is the term for the economic effect where one party's action influences another third party?

The term that describes the economic effect where one party's action influences a third party is known as externalities. Externalities occur when the actions of individuals or businesses have unintended consequences that affect others who did not choose to be involved in the situation. These can be either positive or negative; for example, a factory that pollutes the environment creates a negative externality affecting the health and property of nearby residents, while a well-maintained park that enhances neighborhood aesthetics creates a positive externality benefiting the community.

Understanding externalities is crucial because they often lead to market failures, where the market does not allocate resources efficiently on its own. Recognizing the influence of one party's actions on others helps in developing policies that can address these effects, such as taxation on negative externalities or subsidies for positive ones. In contrast, terms like market failures, standard of living, and productivity do not specifically refer to this relationship between parties but rather to broader economic concepts or measures.