Negative Externality
Plain definition
A negative externality is a cost of an economic activity imposed on third parties who did not agree to bear it.
In economics
Negative externalities make social cost exceed private cost, so the market overproduces the good. Standard remedies include Pigouvian taxes equal to the marginal external cost, tradable pollution permits, or direct regulation.
Example
Air pollution from a coal power plant raises health costs for downwind communities who never bought its electricity.
Common confusion
A negative externality is not any bad outcome of a business decision; losses borne by the decision-maker themselves (private costs) do not count.