Negative externality
Definition. A negative externality is a cost imposed on third parties who are not part of an economic transaction, arising from its production or consumption, for which no compensation is paid. Pollution from a factory is a common example of a negative externality of production.
Where negative externalities exist, marginal social cost exceeds marginal private cost, so the free market overproduces relative to the social optimum. The resulting overconsumption or overproduction creates a deadweight welfare loss.
This term belongs to Externalities in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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