What is a negative externality?

• What is a negative externality?:

  • negative externalities are the costs to a third party that are not included in the price of the economic activity
• Pollution can cause health problems such as asthma or lung cancer which will increase healthcare spending.
• The cost of treating these illnesses is an example of a negative externality because it is not paid by the firm who caused them but instead by society through increased healthcare spending.
• In a free market individual producers only consider their private costs of production they ignore the full social cost of their action
• The end result of producing goods and services is a misallocation of resources where too many resources are allocated to this market than is socially desirable. This generates a welfare loss with society bearing more cost than benefit