negative externalities

Negative externalities occur when the actions of individuals or businesses have harmful effects on others that are not accounted for in the decision-making process. For example, a factory that pollutes the air may reduce the health and well-being of nearby residents, leading to increased medical costs and reduced quality of life. These costs are not reflected in the price of the factory’s products, meaning society bears the consequences without compensation. In essence, negative externalities represent a disconnect between private actions and their broader social impact, ultimately highlighting the need for regulation or intervention to address such issues.