Externality

An externality refers to the unintended side effects or consequences of an economic activity that impact third parties or society without being reflected in the market prices of the goods or services involved. These effects can be positive, providing external benefits (such as improved public health from education), or negative, imposing external costs (such as pollution). Externalities often lead to market inefficiencies, as private decision-making does not account for the broader social impact.

Example: A factory emitting pollutants creates a negative externality by harming the health of nearby residents, while a homeowner planting trees that improve air quality generates a positive externality.