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Effect of a Negative Externality
The cost that a third party has to suffer due to an economic transaction is known as Negative Externality. Externalities are also called ‘spill over’ effects and Negative Externality is also termed as ‘External Costs’. The producer and the consumer are the first and second parties in an economic transaction. The aforesaid third party is any individual or organizations who are affected by this transaction in an indirect way. In case of Negative Externalities, this effect is harmful. External Costs cause inefficiencies in the market.

The effect of negative Externality can be explained with a simple example: Suppose when you burn firecrackers to celebrate an occasion, the harmful gases cause discomfort to your neighbors. It also pollutes the air and adds to health concerns. This is an external cost that your neighbors are paying because of you.

In economic terms, goods or services with negative externalities will face market failure since they do not take into consideration the external costs. Government has imposed taxes on several such goods with negative externalities to make the consumers pay the social cost.

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